THE 

ARTHUR  YOUNG 

ACCOUNTING 

COLLECTION 


Graduate  School  of 
Business  Administration 

Library  of  the 

University  of  California 

Los  Angeles 


SOUTHERN 

RC1T^  OF 
LIBRARY 

-  S   ANGELES.  CALIF. 


Library 

Graduate  School  of  Business  Administration- 
University  of  California 
Los  Angeles  £4,  California 


THE  PHILOSOPHY 
OF  ACCOUNTS 


By 

CHARLES  E.  SPRAGUE,  A.M.,  PH.D.,  C.P.A. 

Author  of  "The  Accountancy  of  Investment" 
and  "Extended  Bond  Tables" 


FIFTH  EDITION 


NEW   YORK 

THE  RONALD  PRESS  COMPANY 
1922 


79503 


COPYRIGHT,  1907,  1908,  BY 
CHARLES  E.  SPRAGUE 


COPYRIGHT,  1922,  BY 
THE  RONALD  PRESS   COMPANY 


All  Rights  Reserved 


Bus. 
Library 


/22 

PUBLISHERS'   PREFACE 

It  is  now  a  dozen  years  since  Colonel  Sprague  issued  his  first 
edition  of  "The  Philosophy  of  Accounts, "  and  a  number  of  years 
since  death  terminated  his  career  of  unusual  activity  and  achieve- 
ment. As  the  years  pass  by  the  truly  fundamental  nature  of  his 
teaching  and  writing  along  lines  of  accounting  and  investment 
becomes  more  clear.  In  the  subject  of  accounting  particularly, 
which  has  developed  with  giant  strides  in  that  interval,  it  is  sur- 
prising how  accurately  his  logical  mind  outlined  fundamental 
points  of  theory  accepted  as  common  enough  now,  but  hardly 
more  than  mathematical  generalizations  when  they  were  ad- 
vanced by  him.  It  has  been  well  said  that  Sprague  stands  as  the 
first  American  writer  on  the  subject  of  modern  accounting  theory. 

Colonel  Sprague's  work  on  "The  Philosophy  of  Accounts," 
therefore,  stands  today  as  a  classic  of  American  accounting  litera- 
'  ture.  Even  in  its  fragmentary  form  of  a  twenty-one  chapter 
discussion  with  two  short  monographs  on  the  Cash  account  and 
the  Merchandise  account,  it  presents  a  most  remarkable  and 
complete  piece  of  consistent  logical  reasoning.  Other  writers 
have  elaborated  the  principles  so  clearly  set  forth  by  Colonel 
Sprague,  and  the  development  of  technique  has  moved  far  beyond 
anything  that  was  thought  of  in  the  days  when  "The  Philosophy 
of  Accounts ' '  was  written.  Nevertheless,  the  principles  will  stand 
as  he  set  them  forth,  and  every  accountant  whose  professional 
training  is  complete  is  supposed  to  have  read  this  work  in  its 
original  form. 

For  these  reasons  the  publishers  are  bringing  out  this  edition 
of  "  The  Philosophy  of  Accounts."  Preceding  the  text  of  the  dis- 
cussion are  four  short  tributes  from  men  who  knew  Colonel 
Sprague  well  when  he  was  still  actively  engaged  in  educational 
work.  Following  this  is  the  discussion  proper.  The  spelling  of 


iv  PUBLISHERS'  PREFACE 

some  of  the  words  which  originally  appeared  in  the  simplified 
spelling  form,  of  which  Colonel  Sprague  was  a  great  advocate,  has 
been  changed  in  this  edition  to  the  conventional  forms  of  spelling, 
as  this  renders  reading  somewhat  easier.  The  wording  and  sense 
of  the  book,  however,  have  been  in  no  way  changed. 

THE  RONALD  PRESS  COMPANY. 


INTRODUCTORY  NOTES 


I  shrink  from  trying  to  make  a  sketch  of  Colonel  Sprague. 
He  was  one  of  the  finest  men  I  ever  knew  and  his  face  and  per- 
sonality live  vividly  in  my  memory.  He  was  a  gentleman  of  the 
old  school,  courtly,  sensitive,  tactful;  a  man  of  wide  culture  with  a 
genuine  love  for  beauty  in  art  and  literature;  a  scholar  without 
pride  of  attainment,  but  insistent  in  his  love  of  scientific  accuracy; 
a  soldier,  and  you  felt  that  in  a  battle  he  would  be  a  brave  fighter; 
and,  in  addition,  a  banker,  an  accountant,  and  a  square,  honorable 
business  man. 

Very  few  realize  what  an  important  part  Colonel  Sprague 
played  in  the  organization  and  development  of  the  School  of 
Commerce,  Accounts  and  Finance  of  New  York  University.  He 
was  one  of  the  first  to  pass  the  state  C.  P.  A.  examination.  He 
realized  the  necessity  of  the  right  kind  of  education  if  the  pro- 
fession was  to  occupy  that  position  in  economic  life  to  which  it 
was  entitled.  When  the  New  York  State  Society  of  Certified 
Public  Accountants  appointed  a  committee  to  consider  the  ques- 
tion of  professional  education,  Colonel  Sprague  made  himself  an 
unofficial  member  of  that  committee.  Their  labors  resulted  in  a 
report  presented  to  the  Society  in  December,  1900,  in  which  the 
members  of  the  Society  were  advised  that  New  York  University 
had  agreed  to  establish  a  school  for  the  purpose  of  training  men 
for  business.  The  progress  made  in  twenty  years  is  strikingly 
shown  by  comparing  the  curriculum  of  today  with  the  outline  of 
courses  incorporated  in  that  report. 

University  administrators  are  conservative  by  nature  and  the 
organization  of  a  frankly  professional  school  of  business  was  an 
innovation.  Not  only  was  it  looked  at  askance  within  the  Uni- 


VI  INTRODUCTORY  NOTES 

versity  itself,  but  the  so-called  practical  men  of  business  as  well  as 
administrators  of  other  colleges  opposed  the  movement.  It  was 
not  to  be  expected  that  Chancellor  MacCracken  of  New  York 
University  would  view  the  matter  differently  from  most  college 
presidents.  He  was  a  man  of  vision  and  the  process  of  conversion 
was  more  easily  undertaken  on  that  account,  but  he  knew  that 
the  proposed  school  would  have  no  endowment  and  he  clearly 
saw  that  he  could  not  safely  add  to  the  financial  burdens  under 
which  his  institution  was  laboring. 

When  things  appeared  darkest  and  when  it  seemed  as  though 
the  project  was  likely  to  fail,  Colonel  Sprague  decided  to  adopt 
unusual  measures  as  an  unofficial  committee  of  one.  He  rented 
the  house  of  one  of  the  University  professors  for  the  summer 
vacation.  In  this  way,  he  was  bound  to  meet  the  Chancellor 
on  the  campus,  and  during  their  frequent  walks  together,  they 
discussed  the  project  that  was  nearest  to  the  Colonel's  heart. 
We  cannot  measure  the  extent  of  the  influence  which  Colonel 
Sprague  brought  to  bear  upon  Chancellor  MacCracken  through 
this  unusual  step.  He  made  his  own  opportunity;  the  method 
was  novel ;  the  Colonel's  quiet  and  modest  manner  was  effective, 
and  he  communicated  something  of  his  own  firm  conviction  to 
the  Chancellor.  Although  no  endowment  was  provided,  the 
Chancellor  was  assured  that  no  deficit  from  operation  would 
result.  Whatever  may  have  been  the  effect  we  know  that  the 
Chancellor  finally  gave  his  approval.  The  Colonel  was  a  member 
of  the  original  faculty  and  served  the  University  until  his  death. 

Colonel  Sprague  was  the  first  member  of  the  faculty  of  New 
York  University  School  of  Commerce  whom  I  heard  speak  from 
a  lecture  platform.  It  was  in  the  winter  of  1900-1901.  I  was 
then  connected  with  the  University  of  Pennsylvania  and  was 
spending  a  few  days  in  New  York  in  attendance  on  some  con- 
vention. I  had  heard  of  New  York  University's  new  School  of 
Commerce  and,  under  the  escort  of  Dean  Charles  Waldo  Haskins, 
two  of  my  colleagues  and  I  paid  it  a  visit.  Colonel  Sprague  was 


INTRODUCTORY  NOTES  Vli 

lecturing  on  the  philosophy  of  accounts  to  a  class  of  forty  men  rang- 
ing in  age  from  twenty  to  fifty.  I  knew  little  about  accountancy, 
but  I  was  greatly  impressed  by  the  clearness  of  the  lecturer's 
ideas,  by  the  grace  of  his  manner  and  speech,  and  by  his  most 
courteous  responses  to  the  questions  asked  now  and  then  by  some 
of  the  students.  I  remember  that  I  was  somewhat  surprised  when 
I  was  told  after  the  lecture  that  Sprague  was  not  by  profession  a 
teacher  or  a  writer,  but  was  president  of  a  savings  bank  and 
lectured  without  compensation  because  he  loved  his  subject  and 
had  great  faith  in  the  future  of  the  new  school. 

His  students  all  loved  him.  On  the  platform  he  was  intensely 
in  earnest,  always  serious.  I  never  heard  of  any  student  will- 
ingly cutting  one  of  his  lectures.  He  usually  came  to  his  lec- 
ture room  in  evening  dress.  If  any  of  his  colleagues  had  done 
the  same  there  would  have  been  comment  and  undoubtedly  some 
chuckles  among  the  students,  but  there  was  an  instinctive  feeling 
among  the  students  that  Colonel  Sprague  came  in  full  dress,  not 
because  of  any  pride  of  appearance,  but  because  he  had  a  deep 
respect  for  his  evening's  task  and  wanted  to  do  it  as  nearly  right 
as  possible.  He  was  a  most  modest  man,  unassuming  and  with- 
out pretense  of  any  sort. 

After  I  came  to  the  School  in  1901 1  had  many  delightful  talks 
with  Colonel  Sprague  in  my  office  before  and  after  his  lectures. 
We  never  talked  much  about  accountancy,  perhaps  because  he 
knew  I  didn't  know  much  about  it.  He  liked  to  talk  about  the 
books  that  both  of  us  had  read,  and  about  our  college  days  and 
studies,  and  about  what  had  to  be  done  to  make  accounting  a 
real  profession.  I  remember  being  greatly  impressed  by  his  en- 
thusiastic devotion  to  the  welfare  of  his  Alma  Mater  and  by  his 
almost  boyish  love  of  his  old  college  fraternity.  In  fact,  Colonel 
Sprague  was  one  of  the  most  human  men  I  have  ever  met. 

His  book  on  "  The  Philosophy  of  Accounts  "  was  my  first  intro- 
duction to  the  subject  of  accounting.  I  had  tried  to  read  two  or 
three  others  but  had  not  gotten  interested.  But  his  book  gripped 


Vlll  INTRODUCTORY  NOTES 

me  at  once  and  I  read  it  through  almost  at  one  sitting  and  I  am 
proud  to  say  I  feel  sure  I  understood  it.  In  his  book,  as  in  his 
lectures  before  students,  his  aim  is  simplicity  and  clearness.  He 
cared  nothing  about  the  pomp  of  diction  or  the  pretense  of  learn- 
ing and  scholarship.  Like  the  real  soldier  he  was,  he  aimed 
straight  at  the  target  and  scorned  just  making  a  noise. 


JOSEPH  FRENCH  JOHNSON 


New  York  City, 
March  10,  1922. 


II 

Alexander  of  Macedon  is  responsible  for  the  saying,  "I  am 
indebted  to  my  father  for  living,  but  to  my  teacher  for  living 
well."  The  teacher,  indeed,  never  knows  how  far  his  influence 
extends,  and  this  is  even  more  true  today  than  in  ancient  times, 
because  now  the  teacher  molds  the  minds  of  so  many  more. 
Colonel  Sprague  was  the  influencing  mind  over  thousands  who 
received  his  instruction  at  New  York  University.  He  combined 
the  rare  qualities  of  a  sound  pedagogue  and  a  capable  practitioner. 
As  a  result,  his  presentation  of  "The  Philosophy  of  Accounts" 
shows  the  use  of  his  theory  as  a  background  to  explain  the  facts 
of  the  actual  situation. 

Charles  Ezra  Sprague  remained  a  student  throughout  his  life 
and  because  of  that  he  appreciated  and  understood  the  workings 
of  the  minds  of  his  own  students.  The  atmosphere  of  his  class- 
room was  primarily  that  of  learning  as  opposed  to  mere  teaching. 
He  required  high  standards  on  the  part  of  his  students,  not  as  the 
arbitrary  schoolmaster  might  do  but  as  the  leader  who  could  be 
content  with  nothing  less.  He  seemed  to  learn  as  he  taught,  and 
he  worked  harder  than  any  member  of  his  class  to  attain  results 
which  satisfied  him  and  helped  the  student. 

He  never  lost  his  patience,  but  rather  repeated  and  repeated 
again  to  make  sure  that  what  he  was  explaining  was  clear  to  the 
' '  marginal ' '  mind  in  the  class.  In  fact,  his  habit  of  repeating  was 
practiced  so  much  that  students  who  knew  him  well  learned  to 
judge  the  relative  importance  of  his  principles  by  the  number  of 
times  he  repeated  them.  For  example,  he  never  missed  an  oppor- 
tunity to  point  out  the  fallacy  of  the  practice  of  using  the  mis- 
named "merchandise  account."  At  every  chance  he  discussed 
that  conglomeration  in  which  items  of  different  values  are  massed 
under  one  sum,  leading  to  a  "result"  that  is  meaningless. 

ix 


X  INTRODUCTORY  NOTES 

He  possessed  unusual  tolerance,  and  those  of  us  who  remember 
our  experience  in  passing  through  the  scholastic  mill  know  how 
important  a  virtue  that  is  from  the  standpoint  of  the  student.  No 
"doubting  Thomas"  was  ever  dismissed  by  him  abruptly  or  with 
sarcasm — which  is  many  a  teacher's  delight — but  through  an 
exposition  of  the  fundamental  principles  the  inquiring  mind  was 
in  practically  every  case  clearly  convinced. 

The  emphasis  I  have  laid  upon  his  tolerance,  his  unselfish 
use  of  his  time  and  energy,  his  great  popularity,  and  his  ability  to 
illustrate  with  pat  anecdote  the  problems  he  propounded  does  not 
imply  that  he  was  "easy"  with  his  students.  He  was  never 
unduly  severe,  but  in  examinations  he  would  punish  the  student  in 
true  pedagogical  fashion  for  every  mistake,  whether  an  ungram- 
matical  construction,  an  error  in  method,  or  what  not.  Ratings 
of  80  and  90  per  cent  were  quite  usual  in  Colonel  Sprague's 
classes,  but  I  have  not  known  of  many,  if  any,  cases  of  100  per 
cent. 

I  well  recall  my  interview  with  the  Colonel  in  connection  with 
his  rating  of  my  thesis  for  the  Master's  degree.  I  raised  the  ques- 
tion as  to  the  justice  of  a  certain  deduction  of  3  points.  Imme- 
diately his  answer  was,  "You  had  several  typographical  errors 
which,  of  course,  didn't  affect  the  quality  of  your  thesis;  but  in 
preparing  a  thesis  for  the  Master's  degree  I  expected  greater  care 
from  you."  I  had  nothing  more  to  say.  Instead  of  considering 
the  Colonel's  action  unnecessarily  severe  I  realized  that  it  was  an 
invaluable  lesson  on  the  importance  of  carefully  preparing  im- 
portant documents.  Perhaps  that  lesson  did  not  teach  me  very 
much  about  accounting;  it  did  teach  me  a  great  deal  about  care 
and  thoroughness  in  business  matters,  and  that  is  what  the 
Colonel  intended. 

Beyond  a  doubt  Colonel  Sprague  realized  that  his  subject 
offered  the  teacher  very  great  danger  of  being  dull  and  unin- 
teresting. Presenting  sets  of  figures  always  has  a  tendency  to  lull 
an  accounting  class  to  sleep.  That  tendency,  however,  never 


INTRODUCTORY  NOTES  XI 

materialized  in  his  classes.  He  was  one  of  those  men  of  genius 
who  can  put  romance  into  accounting  statements  and  analyze 
figures  as  if  they  were  mystery  stories.  It  was  no  wonder  that  his 
classes  were  notable  for  the  interest  he  put  in  them. 

Colonel  Sprague's  spirit  will  always  remain,  and  his  memory 
will  always  be  dear  to  those  men  of  the  New  York  University 
School  of  Commerce,  Accounts  and  Finance,  who  were  privileged 
to  hear  and  know  him.  His  contribution  as  a  teacher  will  be  a 
lasting  monument. 


LEO  GREENDLINGER 


New  York  City, 
March  10,  1922. 


Ill 

Fourteen  years  ago  there  was  published  "The  Philosophy  of 
Accounts"  which  became  at  once  an  accepted  authority  as  to  the 
meaning,  purpose,  and  method  of  use  of  accounting  records.  Such 
prompt  recognition  indicated  that  the  subject  matter  of  the 
book  was  of  important  and  immediate  interest  and  that  its  treat- 
ment was  of  unusual  excellence,  embodying  the  thoughts,  research, 
and  experience  of  the  writer.  While  most  people  who  are  interest- 
ed in  a  subject  think  about  it  to  some  extent,  only  few  fortify 
their  thoughts  through  research  to  see  whether  their  conclusions 
are  based  upon  facts,  and  fewer  still  establish  their  conclusions  by 
putting  them  to  the  test  of  practice.  This  book  is  the  product  of 
all  three  processes. 

It  was  to  be  expected  that  Colonel  Sprague's  work  would  have 
its  effect  upon  the  students  who  took  it  up,  for  the  personality 
of  the  man  is  inseparably  associated  with  his  achievements. 
Upon  those  who  knew  him  in  any  relation,  whether  as  colleague, 
friend,  or  teacher,  he  very  distinctly  impressed  himself,  not 
through  effort  so  to  do  but  through  his  marked  individuality,  so 
that  any  appraisal  of  the  effect  of  his  work  must  be  colored  by 
the  remembrance  of  his  qualities. 

A  man  highly  gifted  by  nature  and  cultivated  through  liberal 
and  yet  intensive  study,  he  very  naturally  became  a  leader  in  the 
sphere  in  which  he  elected  to  move.  That  this  sphere  should  have 
been  "  accountancy  "  was  perhaps  somewhat  surprising,  for  at  the 
time  he  first  became  identified  with  this  calling  its  rewards  were 
not  so  attractive  as  they  have  since  become,  nor  did  he  attempt 
to  earn  them  through  his  practice.  It  was  fortunate  for  the  new 
profession,  however,  that  he  elected  to  follow  it.  His  devotion 
to  his  work  was  manifested  first  in  what  may  be  termed  the  "dark 
ages"  of  accountancy  when  about  thirty-five  years  ago  the  in,- 


xiv  INTRODUCTORY  NOTES 

dividual  accountant  began  to  lift  his  head  above  the  waters  and 
to  recognize  others  of  his  species,  with  a  resultant  drawing  to- 
gether. It  was  then  that  the  earliest  associations  of  individual 
practitioners  began  to  take  shape  and  the  National  Institute  of 
Accounts  and  the  American  Association  of  Public  Accountants 
were  organized.  That  Colonel  Sprague  should  have  been  among 
the  earliest  to  assume  membership  in  these  organizations  was 
characteristic  of  the  man,  for  he  had  little  to  gain  for  himself 
and  much  to  give  to  others.  This  was  true — it  may  be  re- 
marked— not  only  of  him  but  of  many  others  of  those  earnest 
pioneers  who  believed  there  was  a  need  of  trained  accountants 
and  desired  that  there  should  be  men  qualified  to  meet  the 
need. 

When  these  earlier  organizations  had  been  in  existence  for 
some  ten  years  and  when — owing  in  at  least  some  part  to  that 
fact — organized  effort  was  made  to  obtain  the  C.  P.  A.  law  in 
New  York,  Colonel  Sprague,  as  might  have  been  expected,  was 
ready  to  assist  in  every  way  possible.  When  the  first  certificates 
under  the  new  law  were  issued  he  received  No.  1 1  in  due  alpha- 
betical order,  and  soon  after  the  New  York  State  Society  of 
Certified  Public  Accountants  was  organized  he  became  a  member. 
It  was  much,  in  this  early  stage  of  associated  effort,  to  have  the 
co-operation  of  such  a  man.  His  acquirements  were  so  extensive, 
his  plans  for  advancement  of  accountancy  so  definite,  his  interest 
so  sympathetic,  that  all  who  worked  with  him  were  stimulated 
by  the  contact.  As  is  well  known,  Colonel  Sprague  became  a 
member  of  the  first  Certified  Public  Accountant  Examining 
Board  and  gave  to  it  the  kind  of  service  which  he  would  naturally 
give;  the  service  had  to  be  its  own  reward  but  this,  from  his 
point  of  view,  was  ample  compensation. 

Colonel  Sprague  shared  the  vision  that  the  time  would  come 
when  facilities  would  be  established  for  training  men  to  become 
fully  qualified  accountants,  and  every  effort  which  led  towards 
tliat  end  received  his  sympathetic  support.  Therefore,  when  it 


INTRODUCTORY  NOTES  XV 

became  manifest  that  the  time  to  translate  his  vision  into  fact 
had  arrived,  he  joined  whole-heartedly  with  others  who  were  of 
like  mind  in  the  organization  and  support  of  the  School  of  Com- 
merce, Accounts  and  Finance  of  New  York  University.  To  this 
institution,  with  its  small  beginnings,  he  lent  the  aid  of  his 
technical  knowledge  and  experience  through  the  period  of 
years  during  which  he  was  such  a  successful  and  highly  esteemed 
teacher. 

It  is  a  far  cry  from  the  days  when  through  much  effort  and 
with  very  slight  recognition  the  first  definitely  organized  course 
of  accounting  instruction  was  co-ordinated  with  a  long-established 
institution  of  higher  learning,  to  the  present  when  the  daily  papers 
and  highest  class  magazines  carry  the  display  advertising  of 
many  schools  and  colleges  offering  accountancy  instruction. 
Those  who  were  instrumental  hi  this  early  achievement  were 
indeed  pathfinders  blazing  the  way.  The  way  has  been  made 
smoother  since  then,  but  its  direction  and  general  features  re- 
main unchanged. 

It  was  characteristic  of  Colonel  Sprague's  work  that  his 
special  contribution  to  the  literature  of  accountancy  should  be 
"The  Philosophy  of  Accounts,"  for  his  mind  insistently  sought 
the  reasons  for  any  action  and  was  more  interested  in  the  prin- 
ciple than  in  the  mechanics — with  the  "why"  rather  than  the 
"how."  Yet  procedure  was  by  no  means  neglected,  and  in  a 
marked  degree  his  book  makes  clear  the  regular  steps  through 
which  the  transactions — for  whose  record  the  accounts  are 
created — should  be  successively,  logically,  and  accurately  ex- 
pressed. Abstract  principles  or  abstract  rules  find  little  place  in 
his  work,  but  the  student  is  led  to  see  the  "wherefore"  as  a  pre- 
liminary to  each  successive  record  up  to  the  last. 

No  one  can  claim  that  this  deductive  method  originated  with 
or  was  limited  to  Colonel  Sprague,  but  it  is  doubtful  if  anyone 
emphasized  it  to  such  a  degree  and  in  so  comprehensible  and 
felicitous  a  way.  His  work  has  made  and  will  continue  to  make 


XVI  INTRODUCTORY  NOTES 

its  impress  upon  the  study  of  accountancy,  but  in  the  minds  of 
those  who  knew  him  his  largest  contribution  was  the  gift  of  him- 
self and  this  is  always  the  supreme  legacy. 


JOHN  RICE  LOOMIS 


New  York  City, 
March  10,  1922. 


IV 

For  a  hundred  and  fifty  years  after  the  time  of  Paciolo's 
"Summa,"  little  was  written  in  a  serious  way  on  the  theory  of 
double-entry  bookkeeping.  It  is  true  that  many  works  on  double- 
entry  bookkeeping  were  published,  but  almost  all  of  them  were 
mere  handbooks,  serviceable  hi  drilling  the  student  hi  the  art  of 
bookkeeping,  but  barren  of  theory.  Paciolo's  work  itself,  vastly 
important  though  it  has  been,  is  a  book  of  practical  directions, 
telling  how  books  are  to  be  posted,  how  to  check  back  a  ledger, 
how  to  enter  an  inventory — even  how  to  mark  the  book  with  the 
sign  of  the  cross — but  paying  no  attention  to  theoretical  matters. 
For  generations  little  was  written  that  was  at  best  more  than  a 
half-concealed  plagiarism  of  Paciolo.  Even  in  later  times  there 
has  been  a  surprising  adherence  to  tradition,  and  rules  and  forms, 
directions  and  explanations  have  from  writer  to  writer  followed 
the  precedent  set  in  earlier  years.  In  general,  the  literature  of 
bookkeeping  is  a  dreary  succession  of  banal  directions,  showing 
h'ttle  originality,  little  systematic  thinking. 

This  is  particularly  true  in  America.  When  Sprague's  "The 
Philosophy  of  Accounts"  appeared  in  1906,  there  were,  indeed, 
few  American  texts  which  could  lay  any  claim  to  scientific  distinc- 
tion. There  were  many  texts  written  primarily  for  commercial 
schools,  there  were  some  sets  of  intelligent  answers  to  accounting 
problems,  there  were  one  or  two  books  dealing  with  some  phase 
of  corporation  accounting,  there  were  a  few  excellent  works, 
among  them  Sprague's  own  "Accountancy  of  Investment, "  deal- 
ing with  some  limited  field  of  accounting,  but  one  may  search  in 
vain  for  any  general  treatise  dealing  with  the  theory  of  accounts. 

In  England  the  situation  was  scarcely  better  as  regards  theory. 
Even  the  masters  of  accounting,  honored  alike  on  both  sides  of 
the  Atlantic,  were  blind  followers  of  tradition  in  regard  to  the 

xvii 


xviil  INTRODUCTORY  NOTES 

theory  of  bookkeeping,  as  may  be  instanced  by  quoting  from  one, 
perhaps  the  acknowledged  leader  of  them  all,  who,  in  explaining  a 
simple  balance  sheet,  says  "The  owner  is  creditor  of  the  business 
for  £i,ooo,"and  within  the  compass  of  the  same  paragraph, 
following  a  time-worn  but  inexcusable  tradition,  states  that  the 
proprietor's  capital  is  the  excess  of  assets  over  the  liabilities. 

If,  then,  one  wishes  to  appraise  the  value  of  Sprague's  con- 
tribution, consideration  must  be  given  to  the  paucity  of  valid 
theory  in  the  current  textbooks  of  his  day.  It  is  the  contrast 
between  "The  Philosophy  of  Accounts"  and  what  went  before 
that  gives  significance  to  the  work. 

Primarily,  praise  is  due  to  the  successful  effort  made  to  give 
a  sane  presentation  of  the  fundamental  principles  of  double- 
entry  bookkeeping.  The  approach  to  bookkeeping,  in  earlier 
authors,  was  generally  through  the  transaction.  The  isolated 
journal  entry  was  regarded  as  the  central  fact  in  bookkeeping. 
The  equivalence  between  debit  and  credit  was  treated  as  its 
fundamental  principle.  But  that  is  formal.  Double-entry  book- 
keeping might  exist,  with  practically  all  its  benefits  to  business, 
without  debits  or  credits.  Sprague  shows  that  the  bookkeeper  is 
not  interested  in  a  mere  game  of  matching  debits  and  credits,  but 
that  he  is  concerned  in  preserving  an  accurate  record  of  assets, 
of  liabilities,  and  of  the  changing  proprietorship.  He  presents  to 
the  student  an  explanation  of  technique  which  relates  itself  to  an 
obviously  desirable  end :  knowledge  of  the  status  and  the  progress 
of  the  business,  grouping  all  around  the  balance  sheet,  "the 
groundwork  of  all  accountancy,  the  origin  and  the  terminus  of 
every  account." 

Because  of  this  method  of  handling  the  subject  there  is  an 
avoidance  of  the  previously  well-nigh  universal  futility  of  framing 
some  universal  rule  for  determining  debits  and  credits.  This 
persistent  attempt  of  earlier  writers  has  generally  led  to  confusion 
and  absurdity.  The  favorite  formula  was:  Debit  what  the  busi- 
ness receives.  But  it  requires  considerable  mental  gymnastics  to 


INTRODUCTORY  NOTES  xix 

apply  this  formula,  when,  for  instance,  the  student  is  faced  with 
the  problem  of  booking  a  loss  by  fire.  The  naive  thinker  has 
difficulty  in  discovering  the  thing  received,  although  the  sophis- 
ticated student  of  bookkeeping  rules,  posits  an  imaginary  person, 
called  "Profit  and  Loss,"  or  "Loss  by  Fire,"  seated  on  a  pile  of 
ashes,  who  receives  the  burned  property,  and  him  he  debits.  In 
most  bookkeeping  texts  the  attempt  at  a  single  rule  leads  ulti- 
mately, not  merely  to  gymnastics  and  confusion  but  to  contradic- 
tion and  absurdity.  But  Sprague  has  emphasized  the  fact  that 
debit  means  addition  in  one  class  of  account  and  subtraction  in 
the  other  two  classes.  From  this  he  shows  that  in  each  of  the 
nine  possible  combinations  occurring  in  bookkeeping  entries,  a 
debit  always  is  accompanied  by  a  corresponding  credit — a  con- 
venient check  on  accuracy  rather  than  a  principle.  And  the 
result  is  not  merely  a  rule-of- thumb,  not  merely  a  clear  and 
correct  statement,  but  an  explanation  which  is  expressed  in  terms 
significant  to  the  desired  result  of  all  bookkeeping.  The  older 
explanation  trained  the  student  to  look  upon  entries  in  the  books 
as  a  series  of  records  of  receivings  and  of  givings,  not  always  clear 
as  to  whether  the  recipient  was  an  abstract  "business,"  or  the 
person  named  at  the  top  of  the  account.  After  working  through 
a  month  or  a  year,  recording  esoteric  receipts  which  apparently 
have  nothing  to  do  with  business  interests,  the  student  performed 
a  mysterious  process  called  "closing  the  books"  (accompanied 
with  certain  cabalistic  marks,  always  in  red  ink,  or  the  magic 
would  not  work),  and  behold,  instead  of  a  simple  record  of  re- 
ceivings and  givings  there  appear  "Assets,"  "Liabilities,"  and 
"Net  Worth."  Sprague  avoids  this  fantastic  approach  to  book- 
keeping. Entries  are  made  because  every  business  man  desires  a 
record  of  assets,  liabilities,  and  proprietorship,  and,  the  conven- 
tions by  which  positive  and  negative  items  are  recorded  being 
explained,  the  whole  process  becomes  rationalized  and  intelligible. 
A  third  service  rendered  to  accounting  theory  is  the  abandon- 
ment of  the  conventional  classification  of  accounts.  This  most 


XX  INTRODUCTORY  NOTES 

frequently  was  a  division  into  personal  and  impersonal  accounts. 
But  in  almost  every  case  (there  are  a  few  exceptions)  personal 
accounts  included  both  accounts  receivable  and  capital,  which 
are  altogether  dissimilar;  and  impersonal  accounts  included  profit 
and  loss  and  notes  receivable  which  also  are  dissimilar.  Accounts 
receivable  and  notes  receivable,  which  in  many  respects  are 
almost  identical,  on  the  other  hand  are  separated,  as  are  also  the 
proprietor's  capital  and  profit  and  loss,  although  they  are  so  much 
akin  that  once  each  year  they  blend  and  merge  one  into  the  other. 
Sprague  makes  a  simple  logical  division,  one  group  containing  the 
assets  and  liabilities,  the  other  containing  capital  and  profit  and 
loss.  He  thus  substitutes  systematic  treatment  for  a  classifica- 
tion which  was  made  up  on  one  hand  of  meaningless  and  unreal 
distinctions,  and  on  the  other  of  a  grouping  together  of  categories 
which  should  be  kept  separate. 

Mention  may  also  be  made  of  Sprague's  refreshing  freedom 
from  the  trammels  of  convention  so  prevalent  in  accounting. 
For  decades  bookkeepers  continued  to  use  "to"  and  "by"  when 
the  two-column  journal  made  them  unnecessary.  The  day  book, 
now  happily  discarded,  continued,  as  Row  Fogo  has  shown,  long 
after  the  necessity  which  existed  in  the  days  of  Paciolo  had  dis- 
appeared. Even  in  this  somewhat  careless  age,  moral  maxims 
still  appear  in  many  a  bookkeeping  text,  in  a  way  foreign  to  any 
other  scientific  writings,  merely  because  the  first  treatise  was 
written  by  a  Franciscan  monk  who  interlarded  his  text  with  warn- 
ings against  sloth,  and  inculcation  of  attendance  at  mass.  It  is 
then  really  refreshing  to  find  independence  of  tradition  in  a  work 
on  accounts.  Sprague  tells  us  that  the  record  in  the  stubs  of  a 
check  book  is  a  real  account;  that  the  arrangement  of  accounts 
and  of  books  may  be  indefinitely  varied,  that  the  ordinary  form 
of  ledger  account  may  at  times  advantageously  be  abandoned. 
He  has  done  much  to  introduce  flexibility  and  sense  in  place  of 
subservience  to  convention. 

These  are  some  of  the  things  which  make  "The  Philosophy  of 


INTRODUCTORY  NOTES  xxi 

Accounts"  noticeable.  As  to  the  influence  which  the  book  has 
had  on  subsequent  writers,  one  has  only  to  examine  the  treatises 
which  have  appeared  since  1 906.  These  show  clearly  the  influence 
of  Sprague's  teaching.  They  may  differ  in  detail;  the  author  in 
some  instances  may  even  unduly  emphasize  what  he  considers  a 
radical  variation  from  Sprague's  formula,  but  the  resemblance  is 
greater  than  the  differences.  The  sanity  and  clarity  introduced 
into  accounting  literature  by  Sprague  is  ines tunable  in  its  value, 
imperishable  in  its  influence. 

It  is  no  detraction  to  the  service  rendered  by  Sprague  that 
some  of  the  points  emphasized  in  "The  Philosophy  of  Accounts" 
had  been  more  or  less  fully  brought  out  by  an  occasional  writer 
in  Italy,  in  Switzerland,  in  Germany,  or  by  Thomas  Jones  in 
America.  Most  of  these  writers  were  little  known  or  have  been 
more  than  half -forgotten.  They  had  little  effect  in  raising  the 
standard  of  bookkeeping  texts.  It  remained  for  Sprague  to 
present  a  well-rounded  treatise,  which  marks  a  real  step  in  ad- 
vance in  American  accounting  literature. 

While  this  article  is  by  prescription  limited  to  a  consideration 
of  matters  of  accounting  theory,  and  another  and  more  com- 
petent pen  is  dealing  with  the  more  personal  aspects,  the  writer 
cannot  forbear  paying  a  personal  tribute  to  Colonel  Sprague. 
Man  of  affairs  and  of  books,  original  in  modes  of  thought,  urbane 
in  demeanor,  cosmopolitan  in  interest,  high  type  of  the  scholar 
in  business — from  across  the  continent  may  this  expression  of 
homage  be  added  to  the  contribution  of  those  whose  association 
was  closer,  but  whose  respect  is  no  more  profound. 


HENRY  RAND  HATFEELD 


The  University  of  California, 
March  10,  1922. 


PREFACE  TO  ORIGINAL  EDITION 

It  is  not  within  the  province  of  this  treatise  to  teach  the  Art 
of  Bookkeeping.  Skill  in  that  art  is  attained  by  practice,  either 
in  recording  actual  transactions  in  the  counting  room  or  those, 
simulating  actuality,  which  are  prepared  for  practice  in  the  school 
or  in  the  many  excellent  manuals  of  instruction.  But  facility  in 
the  processes  of  an  established  system  will  not  satisfy  the  inquir- 
ing mind  of  one  who  has  gone  thus  far;  he  will  desire  at  a  proper 
stage  of  his  development  to  know  the  scientific  basis  of  all  sys- 
tems, the  wherefore  as  well  as  the  how.  When  the  subject  is 
taken  up  at  the  collegiate  or  university  stage,  it  is  especially 
fitting  that  the  science  of  accounts  be  unfolded  concurrently  with 
thorough  drill  in  the  art  which  depends  upon  it. 

As  a  branch  of  mathematical  and  classificatory  science,  the 
principles  of  accountancy  may  be  determined  by  a  priori  reason- 
ing, and  do  not  depend  upon  the  customs  and  traditions  which 
surround  the  art.  I  have  endeavored  to  set  forth  these  principles 
simply  and  naturally  without  resorting  to  fictitious  modes  of 
presentation,  but  adhering  to  the  fundamental  equations  and 
their  subequations. 

I  hope  that  my  work  may  be  of  some  utility  to  the  profession 
of  public  accountants  in  the  training  of  their  assistants,  as,  even 
hi  routine  matters,  the  best  work  is  done  by  those  who  under- 
stand the  theory  and  the  reason  of  what  they  are  doing.  To 
business  managers  who  have  not  been  practical  bookkeepers,  it 
may  be  that  I  may  throw  some  light  on  the  methods  in  use  and 
perhaps  point  out  where  they  may  be  made  more  effective. 

I  had  at  one  tune  intended  to  extend  the  book  by  adding  to 
the  twenty-one  chapters  here  given  relating  to  Accounts  in 
General,  a  Part  II  on  Accounts  in  Particular,  hi  which  should 
be  taken  up  all  the  principal  forms  of  account  with  various  sug- 


XXIV  PREFACE  TO  ORIGINAL  EDITION 

gestions  as  to  handling  them.  I  found,  however,  that  the  task 
would  reach  encyclopedic  proportions  if  I  treated  each  type  of 
account  with  the  degree  of  thoroughness  which  has  been  given  to 
Cost  Accounts  by  several  authors  and  to  Investment  Accounts 
hi  my  work  on ' '  The  Accountancy  of  Investment. ' '  I  have  there- 
fore contented  myself  with  an  Appendix,  containing  some  Mono- 
graphs on  a  few  very  essential  accounts. 

I  am  conscious  that  the  work  will  deserve  and  receive  severe 
scrutiny  as  it  is  the  product  of  over  thirty  years'  handling  of 
accounts  in  all  grades  of  service  and  of  six  years'  teaching  the 
subject  in  the  School  of  Commerce,  Accounts  and  Finance  of 
New  York  University. 


CHARLES  E.  SPRAGUE 


54  West  32d  Street,  New  York, 
September,  1907. 


CONTENTS 


PAGE 
PUBLISHERS'  PREFACE  iii 


INTRODUCTORY  NOTES     v 

I     By  Joseph  French  Johnson,  D.C.S.,  LL.D. 

Dean,  New  York  University  School  of  Commerce,  Accounts  and 
Finance 

II     By  Leo  Greendlinger,  M.C.S.,  C.P.A. 

Treasurer,  Alexander  Hamilton  Institute,  New  York  City 

III  By  John  Rice  Loomis,  C.P.A. 

Past  President,  American  Association  of  Public  Accountants;  Member 
of  Loomis  Suffern  and  Fernald,  Certified  Public  Accountants,  New 
York  City. 

IV  By  Henry  Rand  Hatfield,  Ph.D. 

Dean  of  the  Faculties  and  Professor  of  Accounting,  University  of 
California 

PREFACE  TO  ORIGINAL  EDITION xxiii 

CHAPTER 

I    NATURE  OF  THE  ACCOUNT 3 

What  Is  an  Account? — Definition  of  an  Account  of  Value — 
Increase  and  Decrease — An  Informal  Account — Introduc- 
tion of  Totals 

II    FORM  OF  THE  ACCOUNT 8 

Principles  of  Arrangement — The  Standard  Form — The 
Journal  Form — The  Three-Column  Balance  Form — 
Money  Columns  Between 

III  CONSTRUCTION  OF  THE  ACCOUNT 12 

Cash  Account  as  Model — Meaning  of  Each  Side — Exempli- 
fication— Resultant — Equation  of  the  Cash  Account  With- 
out Negative  Quantities — Accounts  of  Indebtedness — 
Account  of  "Me" 

IV  THE  TRANSACTION 22 

Equation  of  the  Balance  Sheet — Equation  of  the  Transaction 
— Six  Occurrences,  of  Which  Every  Transaction  Must 
Contain  at  Least  Two — Examples  of  Each — Analysis  of 
Transactions 

xxv 


xxvi  CONTENTS 

CHAPTER  PAGE 

V    THE  BALANCE  SHEET 30 

Its  Importance — Its  Constituents — How  Constructed — By 
Inventory  —  By  Derivation  —  Adjustments  —  Minuteness 
and  Comprehensiveness  to  be  Reconciled — Group  Ac- 
counts— A  Specimen  Balance  Sheet — Extended  Meaning 
of  "Debtor"  and  "Creditor" — The  Reverse  Method  of 
Presentation — Equation  of  the  Balance  Sheet — Its  Limita- 
tions— Order  of  Arrangement — Partnership  Balance  Sheet 
— Corporate  Balance  Sheet — One-Sided  Form — Business 
Without  Balance  Sheet — Municipal  Accounts 

VI    PHASES  OF  THE  ASSETS 44 

Things  and  Rights — Interconvertible — Uncompleted  Con- 
tracts— Embodiment  of  Services  Given — Storage  of  Ser- 
vices to  be  Received — Capital — Investment 

VII    PHASES  OF  LIABILITIES  .     , 49 

Negative  Assets — Postponed  Decrease  of  Assets — Rights  of 
Others — Uncompleted  Contracts — Loan  Capital — Assets 
Corresponding  to  Certain  Liabilities — Some  Seeming 
Liabilities,  Actually  Offsets — Liabilities  Do  Not  Shrink 

VIII    PROPRIETORSHIP 52 

Phases  of  Proprietorship — As  Rights — Distinction  Between 
Liabilities  and  Proprietorship — As  Service — As  Capital; 
Own  Capital — Fictitious  Methods  of  Presentation  of 
Assets,  Liabilities,  and  Proprietorship — Cash  Theory — 
"The  Business"  Theory 

IX    OFFSETS  AND  ADJUNCTS 58 

Supplementary  Accounts;  Their  Purpose — Offsets  Against 
Assets — Adjuncts  to  Assets — Adjunct  to  Proprietorship — 
Offset  to  Proprietorship  Seldom  Revealed 

X    INSOLVENCY 62 

Converse  of  Proprietorship — Possibility  of  Continuing  in 
Spite  of  Insolvency — Four  Cases 

XI    THE  PERIOD 64 

Equal  Intervals — Minor  Unit,  the  Day — Major  Unit,  the 
Year — Intermediate  Unit,  the  Month;  Sometimes  Week, 
Quarter,  Half- Year 

XII    ECONOMIC  ACCOUNTS 67 

Object  of  the  Business  Struggle — Economic  Accounts  Sub- 
ordinate to  Proprietorship — Their  Purpose,  Analysis — 
Outside  and  Inside  Account — Must  be  Limited  to  Period 
under  Consideration — Outlay  Dependent  on  Consumption, 


CONTENTS  xxvii 

CHAPTER  PAGE 

Not  on  the  Receipt  of  Supplies  nor  on  the  Payment  for 
Them — Exemplified  as  to  Interest 

XIII  THE  ECONOMIC  SUMMARY 79 

Account  Intermediate  to  the  Economic  and  the  Proprietary 
Accounts — Various  Names  for  This  Account — Examples 
of  Profit  and  Loss,  Trading,  and  Distribution  Accounts — 
Statement  in  Untechnical  Form — Tabular  Form 

XIV  THE  TRIAL  BALANCE        90 

Test  of  Equilibrium — Order  of  Arrangement — Accountant's 
Rough  Statement  from  Trial  Balance 

XV    THE  JOURNAL 95 

A  Preliminary  Book — Formerly  Considered  Indispensable 
and  the  Only  Source  of  Posting — Analysis  of  Transactions 
— Form  of  Journal  Entries — Balance  Entries  Through 
Journal — Certain  Entries  for  Which  the  Journal  Is  Ad- 
vantageous— Gradual  Disappearance  of  the  Journal — 
Auxiliary  Books — Monthly  Journalization  of  Auxiliary 
Books — Posting  Delayed — Downfall  of  the  Complete 
Journal 

XVI    POSTING  MEDIUMS 105 

Auxiliary  Books  Become  Subdivisions  of  the  Journal — Sphere 
of  Journal  Now  Limited — Disappearance  of  Day  Book — 
Predigestion  of  Material  —  Columnization  —  Columnar 
Journal — Side-Posting — Loose-Leaf  Journal — Cash  Book 
Used  as  Journal — Cash  Sales 

XVII    POSTING  FROM  TICKETS 114 

Documentary  Record — Ticket  Posting  a  Modern  Method — 
Value  of  Vouchers — Advantages  of  Ticket  Posting — Sup- 
pression of  Details 

XVIII    THE  LEDGER 118 

An  Organized  System — Incomplete  Ledger — Sometimes  In- 
completeness Only  Apparent — Grades  of  Accounts — Sub- 
ordinate Ledgers  —  Controlling  Account  —  General  and 
Subordinate  Ledger  in  the  Same  Loose-Leaf  Book — Private 
Ledger — Tabular  Ledger 

XIX    PRECAUTIONS  AGAINST  ERROR 126 

Causes  of  Error — Comparison — Checking  Off — Calling  Off — 
Reconstructive  Methods — Check  Ledgers — The  Bank 
Balance  Ledger — Reverse  Posting — Application  to  Savings 
Banks — Sectionizing — The  Coupon  Method — Proving  the 
Balance — Double  Balance  Method — Balance  Posting,  or 
Proving  by  Difference 


xxviii  CONTENTS 

CHAPTER  PAGE 

XX    THE  DETECTION  OF  ERRORS 139 

Classification  of  Errors — Selection  of  Procedure — Transposi- 
tion Indicated  by  g's — Correction  of  Error — Narrowing  the 
Field — Tabulation  of  Ledger 

XXI    FIDUCIARY  ACCOUNTS 148 

Accountancy  of  Administration,  Without  Proprietorship — 
Name  of  Fiduciaries — Purpose  of  Accounting — Functions 
of  the  Fiduciary — Equation  of  Fiduciary  Accounts — Ex- 
ecutors' Accountings — Liabilities  Omitted  from  Inventory 
— Accounts  Transformed  into  Schedules — Savings  Banks 
Really  Fiduciaries 

MONOGRAPHS 

A    THE  CASH  ACCOUNT 159 

Definition  and  Extension  of  "  Cash  " — Subdivision  of  Cash — 
Variations  of  Cash  Account — Bank  Account  Superseded 
by  Check  Stub — Check  Book  as  Posting  Medium — Com- 
plex Cash  Book — Columnization,  Two  Principles — Con- 
comitants —  Discounts,  as  Example  —  Journalization 
Through  Cash — Check  Register — Alternate  Pad  System — 
Strip  System — Balancing  Cash — Auditor's  Duty  as  to 
Verifying  Cash  Balance — Verification  of  Bank  Account 

B    THE  MERCHANDISE  ACCOUNT 177 

Specific  and  Economic  Values  in  the  Same  Account — Neither 
Predominant-1 — The  Merchandise  Account  in  the  Old  Mixed 
Form — Different  Views — Difficulties  in  Both  Views — 
Example  of  the  Old  Form — How  to  Close  It — Modern 
Form  Exemplified 


THE  PHILOSOPHY 
OF  ACCOUNTS 


CHAPTER  I 
NATURE  OF  THE  ACCOUNT 

WHAT  Is  AN  ACCOUNT? — DEFINITION  OF  AN  ACCOUNT  OF  VALUE — IN- 
CREASE AND  DECREASE — AN  INFORMAL  ACCOUNT — INTRODUCTION 
OF  TOTALS 

1.  The  word  "account,"  used  in  its  broadest  and  loosest     / 
sense,  means  not  merely  a  narration,  or  a  statement  of  facts,  but 
something  systematic  or  orderly.    A  rambling  tale  narrated  by  a 
gossip  would  not  be  an  account  because  it  is  not  systematic.    An 
account  must  be  a  systematic  statement  of  facts;  but  this  is  not 

all,  it  must  tend  or  point  to  some  conclusion.  An  account,  as 
distinguished  from  a  mere  narration,  is  intended  to  establish 
some  conclusion,  to  prove  or  disprove  some  proposition,  and  its 
parts,  the  facts  of  which  it  is  composed,  must  bear  upon  this 
conclusion  and  must  either  favor  or  oppose  it.  Hence  these 
facts  or  elements  of  the  account  may  either  be  all  of  one  ten- 
dency or  some  of  them  may  be  of  an  opposite  tendency  to  the 
others. 

2.  But  the  accounts  of  which  we  are  trying  to  discover  the 
philosophy  are  of  one  class;  the  original  class  which  gave  the 
name  to  all  the  others,  namely,  accounts  of  value  or  financial  ac- 
counts, and  for  these  we  may,  summing  up  the  foregoing  require- 
ments, adopt  as  our  definition: 

An  account  is  a  systematic  statement  of  financial  facts  of  the  wX" 
same  or  opposite  tendency  leading  to  a  conclusion. 

3.  As  increase  and  decrease  are  the  two  opposing  tendencies 
in  financial  facts,  an  account  must  in  its  form  provide  for  dis- 
criminating between  these  tendencies,  distinguishing  increase 
from  decrease,  positives  from  negatives,  +  from  — . 

3 


4  THE  PHILOSOPHY  OP  ACCOUNTS 

4.  A  very  primitive,  yet  logical  and  effective,  form  for  an  ac- 
count might  be  one  in  which  space  was  reserved  for  only  one 
column  of  figures  and  where  a  conclusion  was  reached  after  every 
entry,  the  distinction  between  increase  and  decrease  being 
expressed  in  the  text  alongside. 

Thus  let  it  be  supposed  that  I  require  to  keep  an  account  of 
my  deposits  with  a  certain  bank.  The  conclusion  sought  for  is, 
how  much  have  I  in  the  bank?  The  positive,  or  plus,  or  additive, 
or  increase  elements  of  the  account  are  the  moneys  which  I  de- 
posit; the  negative,  or  minus,  or  sub  tractive,  or  decrease  elements 
are  the  sums  which  I  draw  out.  If,  then,  the  facts  were  that  I 
deposited  $2,000  and  also  $500  and  that  I  drew  $300  and  $600 
successively  and  again  deposited  $1,000,  an  account  might  be 
constructed  as  follows: 

FIGURE  i 

Deposited $2,000 

Deposited 500 

$2,500 
Drew 300 

$2,200 
Drew 600 


$1,600 
Deposited 1,000 

$2,600 

5.  This  is  certainly  an  account,  and  it  accounts  for  the  con- 
clusion, which  is  that  the  amount  now  in  bank  is  $2,600.    It  is 
not  in  the  ordinary  form  of  an  account,  it  is  not  in  the  most 
effective  form  for  many  purposes,  and  it  is  lacking  in  details 
which  give  incidental  information;  yet  it  conforms  to  the  es- 
sentials of  an  account  and  not  only  leads  to  a  conclusion  but 
expresses  it. 

6.  Elaborated  into  an  account  giving  greater  information,  yet 
retaining  its  simple  form,  this  might  read: 


NATURE  OF  THE  ACCOUNT 


FIGURE    2 
MY  ACCOUNT  WITH  THE  FIRST  NATIONAL  BANK 


1906 
Jan. 


Feb. 


24 


Opened  my  account  by  depositing  check  of 

William  Jones  for 

Deposited  currency  received  from  sale  of  cattle . 

Balance  in  bank 

Drew  by  check  No.  I  to  the  order  of  John  Smith 
for  6  months'  interest  at  6%  on  mortgage  of 
$10,000 


Balance  in  bank. 


Drew  by  check  No.  2  to  the  order  of  Peter  Men- 
ken for  a  loan  to  him .  . 


Balance  in  bank 

Deposited  checks  of  William  Jones . 
Balance  in  bank.  . 


$2,000 

500 


$2,500 


300 


$2,200 
600 


$1,600 
1,000 


$2,600 


7.  Here  we  have  given  many  details  of  the  transactions  which 
will  serve  to  identify  them  and  enable  us  to  prove  them  if  neces- 
sary,  thus  furnishing  information  and  protection.    As  every 
transaction  has  a  date  and  an  amount,  we  have  ruled  vertical  lines 
to  contain  those  particulars.     This  is  on  the  principle  of  tabula- 
tion, that  is,  of  allotting  a  separate  column  to  any  series  of  related 
facts  which  occur  with  regularity. 

8.  Simple  and  unconventional  as  this  method  is,  it  is  used  in 
substance  by  many  good  bookkeepers  on  the  back  of  the  check 
stubs  where  they  keep  account  of  the  bank  balance  by  alternate 
additions  and  subtractions.     Strange  to  say,  these  bookkeepers 
and  some  excellent  accountants  would  be  horrified  to  see  a  ledger 
account  which  was  not  adorned  with  a  "Dr."  and  "Cr."  over  the 
top  and  with  repetitions  of  the  prepositions  "To"  and  "By"  on 
every  line,  thus  doubly  emphasizing  the  fact  that  the  left-hand 
side  is  the  left-hand  side.    They  would  defend  the  simplicity  of 


THE  PHILOSOPHY  OF  ACCOUNTS 


the  stub  account  by  saying  that  it  was  not  an  account,  which  is 
a  very  easy,  but  not  very  satisfying,  way  of  disposing  of  the 
difficulty. 

We  must  insist,  however,  that  the  statement  given  above  is  in 
essence  an  account. 

9.  The  principle  of  tabulation,  or  columnizing,  may  be  applied 
to  this  account  by  providing  two  money  columns  instead  of  one, 
and  in  the  additional  column  placing  the  subtractive  entries. 

FIGURE  3 

FIRST  NATIONAL  BANK 
In  account  with  [Me] 


Date 

Deposits 

Checks 

1906 

Jan. 

2 

$2,000 

ii 

7 

500 

Feb. 

I 

$300 

" 

4 

600 

21 

1,000 

We  do  not  need  to  label  the  several  entries  as  "Deposit"  and 
"Check";  by  allocating  each  to  its  proper  column  we  indicate 
this  more  clearly,  and  we  have  the  further  advantage  of  readily 
ascertaining,  even  in  a  much  more  extensive  example,  the  answers 
to  these  questions: 

How  much  are  the  Total  Deposits? 
How  much  is  the  Total  Drawn? 

These  are  very  valuable  pieces  of  information,  next  in  importance 
to  the  prime  conclusion, 

What  is  the  Balance? 

10.  It  is  therefore  the  custom,  and  wisely  so,  to  separate  the 
positive  and  the  negative  elements  and  to  sum  each  by  itself. 


NATURE  OF  THE  ACCOUNT 


There  are  occasional  exceptions  to  this  and  rightly  so  if  anything 
is  to  be  gained  thereby. 

With  this  understanding,  then,  that  the  two  tendencies  are  to 
be  treated  apart,  we  will  next  consider  the  form  of  the  account. 


CHAPTER  II 
FORM  OF  THE  ACCOUNT 

PRINCIPLES  OF  ARRANGEMENT— THE  STANDARD  FORM— THE  JOURNAL 
FORM — THE  THREE-COLUMN  BALANCE   FORM — MONEY   COLUMNS 

BETWEEN 

n.  We  will  now  consider  what  arrangement  of  space  is  best 
suited  to  the  purposes  of  the  account,  the  positive  and  the  nega- 
tive elements  to  be  kept  separate  so  that  each  may  be  totaled 
when  desired. 

12.  The  information  which  is  required  is  the  following:  How 
Much  Value?    How?    When?     Why?    and  With  Whom?  as  to 
each  transaction.     Supposing  we  are  at  present  providing  for  one 
kind  or  tendency  only,  it  is  evident  that  the  figures  representing 
the  amounts  involved  should  be  free  and  clear  of  the  context 
which  explains  them  and  that  there  is  no  better  method  of  exhibit- 
ing these  figures  than  to  place  them  in  a  vertical  column.    As 
they  are  frequently  the  result  of  a  calculation  embodied  in  the 
context,  it  is  appropriate  that  they  should  follow  the  context  and 
this  brings  the  money  column  to  the  right  of  the  text. 

13.  As  the  date  when  the  transaction  took  place  is  the  identi- 
fying clue  which  we  use  in  looking  for  information,  it  should  also 
have  a  free  and  clear  space,  allowing  the  eye  to  pass  rapidly  from 
one  date  to  another,  and  this  space  should  not  interfere  or  be 
confused  with  the  other  explanatory  matter;  hence  it  will  be 
advantageous  to  place  the  date  column  on  the  left. 

The  remaining  explanatory  text  will  occupy  the  central 
space  and  will  seldom  need  subdivision.  Its  various  details, 
With  Whom,  Why,  and  How,  should,  however,  follow  a  uni- 
form and  unvarying  order  of  sequence  to  facilitate  reference. 
(Figure  4.) 

8 


FORM  OF  THE  ACCOUNT 
FIGURE  4 


[Date] 


[Specification] 


14.  This  is  a  frame  into  which  may  be  fitted  all  items  of  the 
same  kind  or  tendency;  we  have  next  to  provide  for  those  of  the 
opposite  tendency.  The  most  obvious  way  of  doing  this  is  by 
repeating  or  duplicating  the  whole  of  the  above  scheme.  This 
was  anciently  done  on  two  pages  but  it  is  now  customary,  and 
generally  more  convenient,  to  use  but  one.  (Figure  5.) 

FIGURE  5 
THE  STANDARD  FORM  OF  ACCOUNT 


Date 


Date 


The  narrow  columns  at  the  left  of  the  money  columns  marked 
a  are  for  the  purpose  of  indicating  in  some  brief  way  the  exact 
source  of,  or  authority  for,  the  entries. 


IO 


THE  PHILOSOPHY  OF  ACCOUNTS 


15.  This  standard,  or  traditional,  form  of  the  account  is  used 
in  almost  every  set  of  books.    There  is  no  law,  however,  requir- 
ing it  to  be  used  and  there  is  no  harm  in  deviating  from  it  when 
anything  is  to  be  gained  thereby. 

1 6.  There  is  one  feature  in  the  standard  form  which  should 
be  noticed.    There  being  separate  date  columns  on  the  two  sides, 
it  does  not  present  a  chronological  view  of  all  the  transactions. 
If  this  is  desirable  it  can  be  attained  by  adding  merely  another 
money  column  to  the  form  in  Figure  4,  interweaving  the  dates 
and  specifications  of  both  columns  and  separating  the  amounts 
only.    This  is  often  called  the  "journal"  form,  from  the  book  of 
that  name.     (Figure  6.) 

FIGURE  6 
ACCOUNT  IN  JOURNAL  FORM 


Q 


17.  A  variation  of  this  form  provides  a  third  column  in  which 
may  be  entered  the  balance,  or  resultant,  of  the  two  other 
columns,  as  at  c.  (Figure  7.) 


FIGURE  7 
THREE-COLUMN  BALANCE  FORM 


FORM  OF  THE  ACCOUNT 


II 


1 8.  These  are  the  principal  variants,  but  minor  variations 
occur  from  the  exigencies  of  certain  businesses.  For  example,  if 
it  is  very  desirable  to  compare  the  corresponding  amounts  on  the 
two  sides  the  standard  form  may  be  changed  so  as  to  bring  the 
two  money  columns  together.  (Figure  8.) 

FIGURE  8 
MONEY  COLUMNS  BETWEEN 


Date 


Date 


In  this  example  the  money  columns  are  not  exactly  hi  the 
center,  on  the  supposition  that  the  right-hand  entries  require 
briefer  specification  than  those  on  the  left  hand. 

19.  The  form  of  the  account  is  a  matter  of  convenience,  rather 
than  of  prescription.  While  custom  should  not  be  deviated  from 
without  cause,  it  has  no  claim  superior  to  utility. 


CHAPTER   III 

CONSTRUCTION  OF  THE  ACCOUNT 

CASH  ACCOUNT  AS  MODEL — MEANING  OF  EACH  SIDE — EXEMPLIFICA- 
TION— RESULTANT — EQUATION  OF  THE  CASH  ACCOUNT  WITHOUT 
NEGATIVE  QUANTITIES — ACCOUNTS  OF  INDEBTEDNESS — ACCOUNT 
OF  "ME" 

20.  We  have  now  given  to  the  account  a  frame  or  mold  to 
hold  its  contents;  we  must  next  consider  what  is  to  be  placed  in 
the  frame  and  how  arranged. 

21.  An  account  representing  some  form  of  wealth  or  property 
will  be  the  simplest  to  begin  with,  and  we  select  money  because 
it  is  the  easiest  form  of  wealth  to  value.     Such  an  account  repre- 
senting money  (or  any  of  the  substitutes  for  money)  is  called  a 
"cash"  account  from  an  Italian  word  meaning  "box";  it  is  the 
money-box  account. 

22.  Recurririg  to  the  definition  of  an  account,  we  ask:  What 
are  the  facts  of  opposing  tendencies  to  be  recorded  in  a  cash  ac- 
count?   Evidently  increase  and  decrease  of  the  stock  of  money 
in  possession.    What  is  the  conclusion?    The  amount  of  that 
stock  of  money  at  the  time  of  inquiry. 

23.  The  facts  may  be  designated  by  many  pairs  of  names,  as: 

POSITIVES  NEGATIVES 

Receipts  Payments 

Into  the  box  Out  of  the  box 

Plus  Minus 

More  Less 

Increase  Decrease 

The  conclusion  is  known  as: 

12 


CONSTRUCTION  OF  THE  ACCOUNT          13 

POSITIVE 
Stock  of  cash 
Cash  on  hand 
Cash  balance 
Balance 

24.  Let  the  following  be  the  facts  which  it  is  desired  to  record, 
constituting  the  "items"  of  the  account. 

1.  Having  no  money,  I  borrowed  from  A  B  $100  on  January  i. 

2.  Received  my  salary  on  January  31,  $50. 

3.  February  2,  I  repaid  to  A  B  $75. 

4.  On  the  same  day  I  paid  expenses  $49. 

5.  On  February  15, 1  loaned  to  C  D  $35. 

6.  Received  my  salary,  $50,  February  28. 

7.  Repaid  to  A  B  on  March  3,  $13. 

8.  March  5,  loaned  to  C  D  $12. 

9.  Received  salary  on  March  31,  $50. 
10.  Collected  on  April  10  from  C  D  $10. 
n.  Paid  various  expenses  on  April  14,  $27. 
12.  Collected  from  C  D  on  April  15,  $20. 

25.  Using  the  standard  form  of  account  (Figure  5)  and  de- 
ciding arbitrarily  that  the  positive  or  receipt  items  shall  occupy 
the  left-hand  portion,  we  record  the  facts  as  follows: 

FIGURE  9 
CASH  ACCOUNT 


19— 

Jan.      i 

Borrowed    from 
AB  

$100 

19— 

Feb.     2 

Repaid  to  A  B... 
Paid  Expense  .  .  . 

$75 
49 

"      3i 
Feb.  28 
Mar.  31 
Apr.   10 

Rec'd  Salary.  .  .  . 
Rec'd  Salary  
Rec'd  Salary  — 
Collected     from 
C  D  

50 
50 
50 

IO 

"      15 
Mar.    3 

5 
Apr.   14 

Loaned  to  C  D.  . 
Repaid  to  A  B... 
Loaned  to  C  D.  . 
Paid  Expense.... 

35 
13 

12 
2? 

"      15 

Collected     from 
C  D  

20 

14  THE  PHILOSOPHY  OF  ACCOUNTS 

26.  We  have  now  complied  with  the  definition  of  an  account 
in  so  far  that  we  have  made  a  systematic  statement  of  these  twelve 
financial  facts,  six  of  which  are  of  like  tendency  and  six  of  the  op- 
posite tendency.    As  the  total  of  the  receipts  is  $280  and  the 
total  of  the  payments  $211,  it  is  evident  that  the  balance  is,  at  the 
beginning  of  April  16,  $69,  which  is  the  conclusion  sought. 

27.  The  account  in  its  present  form  is  a  current  account.    It 
follows  the  course  of  time  and  gives  a  history  of  the  cash.    The 
conclusion,  or  resultant  of  all  the  facts,  is  necessarily  made  up  at 
some  certain  moment,  and,  for  reasons  which  will  appear  later,  the 
same  moment  is  usually  chosen  for  recording  all  these  resultants 
in  a  group  of  accounts. 

FIGURE  10 
CASH  ACCOUNT 


$100 

$75 

50 

49 

50 

35 

50 

13 

IO 

12 

20 

27 

$280 

$211 

Balance.  .     .  .$  60 

28.  The  most  obvious  way  of  recording  the  resultant,  or 
balance,  would  be  to  sum  up  each  side  and  set  down  the  result 
under  the  greater  sum,  as  shown  in  Figure  10.    As  we  are  now 
concerned  with  values  only  we  omit  the  words. 

29.  This,  however,  is  not  the  most  usual  way  of  expressing  a 
resultant.    The  double  lines  drawn  under  both  sides  usually  de- 
note equality,  like  the  sign  = ,  and  if  they  are  not  equal  they  must 
be  equalized.    The  amount  necessary  to  equalize  the  two  sides  of 
this  account  is  the  balance,  $69,  which  we  have  inserted  in  italics 
(suggesting  the  use  of  red  ink)  to  designate  something  which  is 
not  a  current  transaction  but  an  instantaneous  result,  not  an 
occurrence  but  an  inference. 


CONSTRUCTION  OF  THE  ACCOUNT 

FIGURE  n 
CASH  ACCOUNT 


$100 

$75 

50 

49 

50 

35 

50 

13 

IO 

12 

20 

27 

$211 

Balance  

60 

$280 

$280 

Here  is  a  true  equation.  All  the  receipts  exactly  equal  all  the 
payments  plus  the  balance.  The  preponderance  of  receipts  is 
added  to  the  opposite  side  to  make  equality,  just  as,  in  weighing 
butter,  if  the  scales  are  out  of  balance,  you  do  not  take  off  some 
butter  but  you  add  on  a  weight. 

30.  In  mathematics  the  normal  way  of  asserting  a  truth  is  by 
means  of  an  equation.    The  account  in  its  current  form  (Figure 
9)  merely  gave  the  facts;  it  now  asserts  the  conclusion.    As  sub- 
traction in  accounts  (see  Figure  i)  may  lead  to  confusion,  the 
same  effect  is  produced  by  adding  to  the  other  side. 

280  —  211  =  69 
is  transposed  to  read: 

280  =  211  +  69 

31.  This  principle  of  compensation,  or  adding  to  the  weaker 
side  so  as  to  produce  equality,  is  a  very  important  one  in  accounts, 
as  will  be  seen  when  we  come  to  treat  of  proprietary  accounts. 

32.  The  equation  of  the  Cash  account  may  be  read  in  several 
ways: 

Receipts  =  Payments  +  Cash  on  hand 

280  =211+69 

In  =  Out  +  Remainder 


16 


THE  PHILOSOPHY  OF  ACCOUNTS 


33.  In  this  last  form  any  account  representing  a  property  may 
be  read.    The  increase,  by  acquirement  or  otherwise,  is  recorded 
on  the  left-hand  side ;  on  the  right-hand  side  are  two  things  quite 
at  variance,  in  fact,  antagonistic;  one  the  decrease  of  property  or 
of  value,  the  other  the  resultant  or  value  in  possession. 

34.  Taking  the  right-hand  side  of  the  above  equations,  we  see 
that  the  two  terms  are  contrary: 

211  is  what  has  been  paid  out. 
69  is  what  has  not  been  paid  out. 

280  is  all  that  has  come  in. 

Yet  the  211  and  the  69  are  both  on  the  same  side.  It  is  neces- 
sary to  discriminate  carefully  between  these  two  kinds  of  terms 
and  not  to  assume  that  because  they  are  on  the  same  side,  they 
must  be  congruous. 

35.  To  illustrate  another  class  of  accounts,  those  representing 
indebtedness,  let  us  select  from  the  twelve  items  in  Figure  9, 
some  which  imply  indebtedness.     Such  are  Nos.  i,  3,  5,  7,  8,  10, 
and  1 2 .    Nos.  1,3,  and  7  relate  to  the  dealings  with  A  B ,  to  whom 
the  subject  of  the  narrative  becomes  indebted  and  discharges  the 
debt.    Nos.  5,  8,  10,  and  12  represent  the  converse  relation  with 
C  D,  who  borrows  and  repays.    As  this  loan  to  C  D  is  very  similar 

FIGURE  12 
ACCOUNT  OF  THE  INDEBTEDNESS  OF  C  D  TO  ME 


Feb.   15 

Loaned  him  .... 

$35 

Apr.  10 

Collected  

$10 

Mar.    5 

Loaned  him  .... 

12 

"     15 

Collected  

20 

to  a  piece  of  property,  we  will  place  the  positive  elements,  the 
moneys  loaned,  on  the  left-hand  side  and  the  repayments  on  the 
right.  (Figure  12.)  Notice  that  this  is  exactly  the  opposite  side 
to  the  one  on  which  each  transaction  is  found  in  the  Cash  account. 
This  phase  will  reappear  hereafter. 


CONSTRUCTION  OF  THE  ACCOUNT          17 

36.  C  D  is  called  our  "debtor,"  and  we  are  his  "creditor." 
When  he  discharges  the  debt  in  whole  or  in  part  he  is  also  called 
"creditor,"  by  an  extension  of  language;  really  he  does  not  be- 
come creditor,  but  merely  extinguishes  debt.  Hence  we  can 
make  a  useful  shortening  of  the  heading  by  merely  writing  the 
name  of  the  debtor  with  the  abbreviations  Dr.  and  Cr.  With 
this  change  the  balanced  account  appears  as  follows: 


FIGURE  13 
DR.                                         C               D                                         CR. 

Feb.   15 
Mar.    5 

Loaned  him  .... 
Loaned  him  .... 

$35 

12 

Apr.  10 

"     15 
"     16 

Collected  

$10 

20 
i? 

Collected  

Balance  

$47 

$47 

Again  we  have  the  equation: 

Indebtedness  Incurred  =  Discharge  of  Indebtedness 
+  Balance  Owing  or 
Present  Debt 

or  again: 

Indebtedness  Incurred  =  Indebtedness  Discharged 

+  Indebtedness  not  Discharged 

37.  The  separate  items  on  the  two  sides  are  called  "debits" 
and  "credits";  hence  we  have  another  form  of  the  equation: 

Total  Debits  =  Total  Credits  +  Net  Debt 

38.  These  words  "debit"  and  "credit"  are  often  applied  by 
analogy  to  accounts  where  there  is  no  idea  of  indebtedness,  all 
entries  on  the  left  side  being  called  "debits"  and  all  on  the  right 
"credits." 

39.  The  transactions  with  A  B  are  the  opposite  of  those  with 
C  D ;  the  subject  gets  in  debt  to  A  B  and  gets  out  again.    As  in- 


18 


THE  PHILOSOPHY  OF  ACCOUNTS 


debtedness  to  us  is  entered  on  the  debit  side,  it  would  seem  that 
indebtedness  by  us  should  appear  on  the  credit  side,  and  as  A  B 
is  truly  a  creditor,  this  is  quite  correct.  Discharges  of  his  claim 
are  treated  also  as  debits  and  thus  we  can  use  the  same  form  as 
in  the  account  of  C  D,  the  difference  being  that  C  D's  account 
has  the  larger  total  on  the  credit  side  and  the  balance  on  the 
debit. 


FIGURE  14 
DR.                                          A              B                                          CR. 

Feb.     2 
Mar.    3 
Apr.  16 

Repaid  him  

$75 
13 

12 

Jan.  i 

Loaned  by  him.  . 

$100 

Repaid  him.  .  .  . 
Balance  

$100 

$100 

40.  As  another  way  of  looking  at  accounts  of  personal  in- 
debtedness it  may  be  noted  that  in  both  accounts,  A  B's  and 
C  D's,  the  left  or  debit  side  is  unfavorable  to  the  person  named 
in  the  heading  and  the  right  side  is  favorable,  so  that  instead  of: 


Debtor 


and 


we  might  have  entitled  the  sides: 


Against 
Adverse 
To  the  Bad 


and 
and 
and 


Creditor 


For 

Favorable 
To  the  Good 


41.  These  terms  refer  to  A  B  and  C  D  respectively  and  to 
any  other  debtors  and  creditors.  But  as  regards  the  proprietor 
of  the  Cash  account  these  terms  must  be  reversed  and  what  is 
favorable  to  the  person  with  whom  he  deals  is  unfavorable  to 
the  proprietor  and  vice  versa.  So  that  he  would  be  entitled  to 
write: 


Against  Him 
[but  for  Mel 


For  Him 
[but  against  Me] 


CONSTRUCTION  OF  THE  ACCOUNT         19 

42.  In  the  case  of  Cash,  which  is  inanimate  and  cannot  owe 
nor  be  owed,  he  can  still  designate  the  two  sides  as: 

[For  Me]  [Against  Me] 

43.  Seven  of  the  original  transactions  have  now  been  doubly 
entered,  once  in  the  Cash  account  and  once  in  some  other  ac- 
count; each  being  in  one  place  "for  me"  (debits)  and  in  another 
place  "against  me"   (credits).    As  the  effect  upon  "Me"  is 
neutralized  in  each  pair,  it  is  unnecessary  to  keep  any  account 
with  "Me,"  as  far  as  they  are  concerned. 

44.  But  there  are  five  remaining  entries  which  appear  to  con- 
cern "Me"  alone:  Nos.  2,  4,  6,  9,  and  n.    We  may  open  an  ac- 
count with  "Me"  and,  following  the  precedent  already  estab- 
lished, place  these  five  transactions  each  on  the  opposite  side  to 
where  they  appear  in  Cash  account.    "My"  account  may  be 
headed  "Against "  and  " For "  just  as  if  " I "  were  a  stranger.   We 
shall  see  by  trial  how  this  will  turn  out. 


FIGURE  15 
AGAINST                                  ME                                              FOR 

Feb.     2 
Apr.  14 
Apr.  16 

Expense 

$49 
27 

74 

Jan.   31 
Feb.  28 
Mar.  31 

Salary  

$50 
50 
50 

Expense 

Salary  

Balance 

Salary  

$150 

$150 

45.  "My"  account  shows  a  balance  of  $74  of  preponderance 
in  favor. 

This  balance  is  different  from  that  of  any  of  the  other  ac- 
counts. It  does  not  represent  property,  nor  indebtedness,  but 
proprietorship.  It  shows  the  increase  in  wealth  caused  by  in- 
come being  greater  than  outlay,  which  has  resulted  hi  a  present 
status  of  $74  net  worth. 

46.  This  is  strikingly  corroborated  by  an  independent  opera- 
tion.   Extracting  the  balances  of  all  the  other  accounts,  we  make 
up  this  statement: 


2O 


THE  PHILOSOPHY  OP  ACCOUNTS 


Cash  on  hand . 
Due  from  C  D . 


Less  due  to  A  B 12 

Net  worth  of  "Me" $74 

Thus  by  two  different  processes  we  obtain  the  same  result: 
one  by  an  historical  account,  tracing  the  growth  of  wealth  by 
excess  of  earnings  over  expense,  the  accumulation  of  net  surplus; 
the  other,  not  by  a  current  account  but  an  instantaneous  one, 
which  at  a  given  moment  inventories  the  concrete  results  of  the 
same  struggle. 

47.  The  summary  of  balances  which  was  given  above  is 
usually  presented  in  account  form.  On  the  left  are  the  "assets," 
consisting  of  property  and  claims  upon  property.  On  the  right 
are,  first,  all  claims  against  the  assets,  designated  as  the  "liabili- 
ties"; second,  the  remainder  unclaimed,  or  the  net  assets  free  from 
liability,  variously  known  as  "proprietor  ship,"  "capital,"  "stock," 
or  simply  by  the  name  of  the  proprietor. 

This  statement  is  known  as  a  "balance  sheet." 

FIGURE  16 
BALANCE  SHEET 


Assets 
Cash  on  hand  

$69 

Liabilities 
Due  to  A  B  

$12 

Due  from  CD  

17 

Proprietorship  

74. 

$86 

$86 

48.  I  can  see  no  benefit  in  lumping  the  $12  and  the 
together  and  calling  them  all  "liabilities."  Those  who  use  this 
expression  often  contradict  themselves  by  saying  that  the  pro- 
prietary account  is  the  excess  of  assets  over  liabilities;  but  if  the 
proprietary  account  is  one  of  the  liabilities  there  cannot  be  any 
excess. 


CONSTRUCTION  OF  THE  ACCOUNT          21 

49.  This  miniature  specimen  shows  the  relation  and  inter- 
dependence of  accounts.  They  are  not  isolated  but  each  is  con- 
nected with  others.  When  they  form  a  system  which  provides  for 
the  recording  of  all  occurrences  within  a  given  sphere  of  pro- 
prietorship they  constitute  a  ledger,  the  embodiment  of  whose 
results  is  the  balance  sheet. 


CHAPTER   IV 

THE  TRANSACTION 

EQUATION  OF  THE  BALANCE  SHEET — EQUATION  OF  THE  TRANSACTION 
— Six  OCCURRENCES,  OF  WHICH  EVERY  TRANSACTION  MUST  CON- 
TAIN AT  LEAST  Two — EXAMPLES  OF  EACH — ANALYSIS  OF  TRANS- 
ACTIONS 

50.  We  cannot  at  this  point  enter  upon  a  full  discussion  of 
the  balance  sheet  or  of  the  accounts  whose  results  it  embodies, 
both  very  interesting  subjects. 

51.  It  is  sufficient  at  present  to  say  that  a  balance  sheet  is 
compiled  from  all  the  accounts  of  a  ledger,  or  rather  from  all  that 
are  not  self-closed,  without  residue.    In  theory  it  halts  every  ac- 
count and  makes  it  give  up  its  balance  for  inspection;  but  immedi- 
ately restores  it.    This  restoration  is  naturally  not  to  the  side  to 
which  the  balance  had  to  be  added  but  to  the  side  originally 
preponderant.    It  may  be  to  a  new  account  space,  everything  be- 
ing started  afresh,  or  it  may  be  in  the  same  column  below  the  lines 
( = ),  like  the  balance  brought  down  in  Figure  10.    The  accounts 
of  A  B  and  C  D  would  then  read  thus : 


FIGURE  17 
DR.                                               A  B                                                CR. 

Feb.     2 

Mar.    3 
Apr.  16 

Repaid  him  .... 
Repaid  him  .... 
Balance  

$75 
13 

12 

Jan.     i 

Loaned  by  him.  . 

$100 

$100 

$100 

Apr.  1  6 

Balance  

$12 

22 


THE  TRANSACTION 


DR. 


FIGURE  18 
C  D 


CR. 


Feb.  15 

Loaned  him  .... 

$35 

Apr.  10 

Collected  

$10 

Mar.    5 

Loaned  him  .... 

12 

"     J5 

Collected  

20 

"     16 

Balance  

17 

$47 

#47 

Apr.   1  6 

Balance  

$17 

In  other  words,  the  contents  of  the  balance  sheet  are  dis- 
tributed into  accounts  of  which  they  form  the  first  items. 

52.  Recurring  to  the  balance  sheet,  remember  that  i£  is  an 
equation : 

Assets  =  Liabilities  +  Proprietorship 

and  that  ordinary  balance  sheets  contain  nothing  else;  every- 
thing goes  under  one  of  these  heads. 

53.  The  accounts,  having  been  for  a  moment  halted,  their 
results  inspected  and  restored,  are  now  ready  to  resume  their 
progress.    What  rule  can  be  given  for  the  recording  of  any  future 
occurrence  so  as  to  place  it  unerringly  on  the  proper  side  of  the 
proper  account?    Naturally,  any  increment  must  be  on  the  same 
side  as  the  balance  which  it  follows. 

54.  Any  occurrence  must  be  either  an  increase  or  a  decrease  of 
values,  and  there  are  three  classes  of  values;  hence  there  are  six 
possible  occurrences: 

1.  Increase  of  Assets 

2.  Decrease  of  Assets 

3.  Increase  of  Liability 

4.  Decrease  of  Liability 

5.  Increase  of  Proprietorship 


V 


6.  Decrease  of  Proprietorship 


24  THE  PHILOSOPHY  OF  ACCOUNTS 

55.  Balances  of  assets  belong  on  the  debit  (left)  side;  there- 
fore increases  are  debits  and  decreases  are  credits. 

56.  Balances  of  liabilities  are  credits;  therefore  increases  of 
liabilities  are  credits  and  decreases  are  debits. 

57.  Balances  of  proprietorship  are  credits;  therefore  increases 
of  proprietorship  are  credits  and  decreases  are  debits. 

58.  We  have  therefore  the  six  possible  occurrences  distributed 
as  follows  under  debits  and  credits: 

DEBITS  CREDITS 

Entries  on  left  side  Entries  on  right  side 

Increase  of  Assets  Decrease  of  Assets 

Decrease  of  Liabilities  Increase  of  Liabilities 

Decrease  of  Proprietorship  Increase  of  Proprietorship 

59.  We  have  now  to  show  that  in  every  transaction  at  least 
two  of  the  occurrences  must  appear  and  that  they  must  be  on  op- 
posite sides  of  the  above  list.    This  may  be  done  by  going  through 
the  list  and  taking  up  each  of  the  six. 

1.  Increase  of  Assets.    Suppose  cash  to  be  received;  unless 
some  other  asset  is  given  in  exchange,  or  some  liability  discharged, 
our  total  worth  must  have  increased  by  that  much.    That  is  to 
say: 

Debit     Increase  of  assets  must  either  correspond: 

ito  decrease  of  assets, 
to  increase  of  liability,  or 
to  increase  of  proprietorship. 

We  cannot  get  something  for  nothing;  but  the  something  given 
in  the  third  case  is  not  a  material  something  but  a  service  of  some 
kind. 

Increase  of  proprietorship  by  giving  service  is  called  "earn- 
ings" or  "income." 

2.  Decrease  of  Assets.    If  we  part  with  any  of  our  assets, 
unless  we  either  receive  in  return  some  other  asset  of  equal  value 


THE  TRANSACTION  25 

or  cancel  some  liability  thereby,  we  have  to  the  same  extent 
diminished  our  net  wealth  or  proprietorship. 

Credit    Decrease  of  assets  must  either  correspond: 

Ito  increase  of  assets,  or 
to  decrease  of  liability,  or 
to  decrease  of  proprietorship. 

In  the  third  event  we  have  parted  with  something  of  value 
without  any  tangible  return.  This  is  called  "  outlay."  There  is 
a  true  return,  but  it  is  in  service  received;  as  services  are  not  listed 
in  our  assets,  any  more  than  our  bodies,  our  minds,  and  our  skill, 
we  must  consider  that  the  result  is  a  simple  subtraction  from  our 
net  wealth. 

3.  Increase  of  Liability.     If  we  run  into  debt,  unless  we 
get  something  for  it,  or,  what  is  just  as  good,  get  out  of  another 
debt,  we  must  so  far  as  our  tangible  wealth  is  concerned  have  lost 
proprietorship.    As  increase  of  liability  is  of  exactly  the  same 
effect  as  decrease  of  assets,  we  have  a  series  similar  to  the  second 
one. 

Credit    Increase  of  liability  must  be  attended  either: 

iby  increase  of  assets,  or 
by  decrease  of  liability,  or 
by  decrease  of  proprietorship. 

4.  Decrease  of  Liability.    The  payment  of  debt  may  be  ef- 
fected by  parting  with  some  asset,  or  by  incurring  a  new  debt;  or 
if  by  neither  of  these  means,  but  by  giving  services,  then  the  net 
wealth  is  augmented,  just  as  in  increase  of  assets. 

Debit     Decrease  of  liability  involves  either: 

(decrease  of  assets,  or 
increase  of  liability,  or 
increase  of  proprietorship. 


26  THE  PHILOSOPHY  OF  ACCOUNTS 

5.  Increase  of  Proprietorship.    We  may  increase  our  wealth  in 
the  form  of  more  assets  or  of  less  liability,  both  of  which  are  debits. 

Credit    Increase  of  proprietorship  corresponds  to: 

r,  , ..      J    increase  of  assets,  or 
Debit      \  ' 

I    decrease  of  liability. 

It  may  possibly  correspond  to  a  decrease  of  proprietorship, 
but  this  would  be  an  ideal  shifting  or  transfer  entry.  Thus,  a 
sawmill  being  one  of  our  assets,  and  it  being  desired  to  keep  the 
earnings  of  sawing  separate,  we  consider  that  the  real  estate,  if 
let  to  a  tenant,  would  bring  a  certain  rent;  we  credit  that  rent  as 
earnings  of  real  estate  but  debit  it  as  outlay  on  behalf  of  the  saw- 
ing enterprise. 

6.  Decrease  of  Proprietorship.    This  is  precisely  the  con- 
verse of  the  preceding  and  requires  no  further  argument. 

Debit      Decrease  of  proprietorship  is  either: 

~    , . .    J    decrease  of  assets,  or 
Credit     \     .  ' 

I    increase  of  liabilities. 

It  is  thus  established  that  any  entry  to  the  debit,  or  left  side, 
calls  for  a  like  amount  on  the  credit  side,  and  vice  versa. 

60.  A  few  examples  may  serve  to  indicate  how  transactions 
may  be  analyzed  into  the  debits  and  credits  of  which  they  are 
composed : 

i.  I  purchase  merchandise  for  cash.  There  is  an  increase 
of  assets  in  the  department  of  merchandise.  There  must  therefore 
be  a  corresponding  decrease  of  assets,  or  an  increase  either  of 
liability  or  of  proprietorship,  one  of  the  three  occurrences  on  the 
credit  side.  Evidently  the  first  of  the  three  is  the  true  one  and 
the  entry  is  of  the  form: 

Dr.  Increase  of  Assets  Cr.  Decrease  of  Assets 

In  the  abbreviated  wording  ordinarily  used  this  would  read: 
Assets  Dr.  to  Assets 


THE  TRANSACTION  27 

But  usually  we  specify  more  minutely  what  particular  depart- 
ment of  the  assets,  and  consequently  what  account,  is  affected, 
i.e.: 

Merchandise  Dr.  to  Cash 

This  is  still  further  shortened  to: 

Mdse  to  Cash 
or 

Mdse/Cash 

It  is  understood  that  without  special  designation  the  account 
on  the  left  is  the  one  debited  and  the  one  on  the  right  is  credited. 

The  view  might  very  rationally  be  taken  that  as  the  pro- 
prietorship was  increased  by  acquiring  the  merchandise  and  was 
decreased  by  parting  with  the  money,  therefore  the  two  changes 
of  proprietorship  should  have  appeared  in  the  account,  giving  the 
following  entries: 

Mdse/  Proprietor 
Proprietor/ Cash 

But  it  seems  useless  to  record  hi  the  proprietor's  account  ex- 
changes which  do  not  either  increase  or  decrease  his  net  wealth. 
This  is  attempted  in  the  system  of  logismography,  but  its  utility 
is  doubtful. 

2.  I  purchase  merchandise  from  John  Jones  on  credit.    As 
the  acquisition  of  merchandise  is  a  debit,  we  must  select  from  the 
three  kinds  of  credit  and  get  the  result: 

Dr.  Increase  of  Assets  Cr.  Increase  of  Liability 

Assets  Dr.  to  Liabilities 

Mdse/John  Jones 

3.  Received  cash  for  salary.    As  cash  is  received,  the  debit 
must  be  an  increase  of  assets.    What  is  the  credit?    No  asset 


28  THE  PHILOSOPHY  OF  ACCOUNTS 

figuring  in  the  balance  sheet  has  been  diminished;  no  indebted- 
ness has  been  incurred.  The  result  is  a  clear  increase  of  pro- 
prietorship, earned  by  the  rendering  of  service: 

Dr.  Increase  of  Assets  Cr.  Increase  of  Proprietorship 

Cash/Proprietor 

But  it  is  seldom  that  the  account  of  the  proprietor  receives  im- 
mediate credit  for  an  earning.  Greater  benefit  is  derived  by 
providing  a  number  of  temporary  accounts  which  are  credited 
with  earnings  on  a  plan  of  classification,  during  a  certain  period, 
so  that  a  comprehensive  view  of  the  progress  of  the  proprietor 
during  that  period  is  afforded.  This  transaction  would  doubtless 
be  credited  to  Salary  account: 

Cash/Salary 

4.  We  hold  a  mortgage  which  is  not  yet  due  for  several 
years.  The  interest  is  due  every  half-year.  One  month  has 
elapsed  since  the  last  maturity  and  collection  of  interest.  Wish- 
ing to  bring  our  accounts  down  to  date,  how  shall  we  represent 
the  fact  that  this  one  month's  interest  has  been  earned? 

It  might  be  claimed  that  there  has  been  no  income  because  the 
payment  of  interest  has  not  yet  become  due.  But  by  the  same 
reasoning  it  might  be  proved  that  there  is  no  mortgage  debt,  for 
that  is  not  yet  due.  There  is  hi  fact  an  indebtedness  from  the 
mortgage  debtor  to  us.  It  grows  from  day  to  day,  though  it  may 
not  be  convenient  to  register  it  every  day.  It  is  an  asset  which 
has  been  acquired  during  the  month,  not  by  exchange  for  some 
other  asset,  but  by  rendering  service.  The  service  rendered  is 
the  use  of  our  capital. 

Though  the  indebtedness  from  the  mortgagor  to  us  is  a  per- 
sonal debt,  yet  it  does  not  rest  solely  upon  his  credit,  but  upon 
the  security  of  the  real  estate.  It  is  for  several  reasons  advan- 
tageous to  consider  it  as  a  special  kind  of  asset  and  not  class  it  with 
other  debts  receivable.  The  increase  of  proprietorship  caused 


THE  TRANSACTION  29 

by  services  given  of  this  particular  kind  may  also  have  an  account 
by  itself.  Thus  we  analyze  the  transaction  as  follows: 

Debit.  We  increase  our  assets  by  acquiring  a  claim  for  this 
accrued  interest  in  addition  to  the  principal  debt. 

Credit.  We  do  not  diminish  any  asset  nor  incur  any  liability 
by  doing  so;  therefore  we  have  an  increase  of  proprietorship 
through  the  giving  of  service: 

Accrued  Interest/Interest 

or  Interest  Earnings 

5.  We  receive  in  payment  of  a  debt  partly  cash  and  partly 
a  note,  or  written  promise  to  pay.  Suppose  that  the  debt  is  $200, 
the  cash  $50,  and  the  note  $150.  Two  kinds  of  assets  are  ac- 
quired, and  one  kind  is  parted  with.  We  may  consider  this  as 
two  transactions  or  as  one : 

Cash/John  Jones $50          $  50 

Bills  Receivable/ John  Jones 150  150 

or 

Cash/ 5° 

Bills  Receivable/ John  Jones 150  200 

or  in  the  old  phraseology : 

Sundries  Dr.  to  John  Jones 200 

Cash 50 

Bills  Receivable 15° 

61.  It  is  not  difficult  to  analyze  a  transaction  into  its  debits 
and  credits  if  we  recall  the  six  possible  phases,  three  of  debit  and 
three  of  credit. 


CHAPTER   V 
THE  BALANCE  SHEET 

ITS  IMPORTANCE — ITS  CONSTITUENTS — How  CONSTRUCTED — BY  IN- 
VENTORY— BY  DERIVATION — ADJUSTMENTS — MINUTENESS  AND 
COMPREHENSIVENESS  TO  BE  RECONCILED — GROUP  ACCOUNTS — A 
SPECIMEN  BALANCE  SHEET — EXTENDED  MEANING  OF  "DEBTOR" 
AND  "CREDITOR" — THE  REVERSE  METHOD  OF  PRESENTATION — 
EQUATION  OF  THE  BALANCE  SHEET — ITS  LIMITATIONS — ORDER  OF 
ARRANGEMENT — PARTNERSHIP  BALANCE  SHEET — CORPORATE 
BALANCE  SHEET — ONE-SIDED  FORM — BUSINESS  WITHOUT  BALANCE 
SHEET — MUNICIPAL  ACCOUNTS 

62.  The  balance  sheet  may  be  considered  as  the  groundwork 
of  all  accountancy,  the  origin  and  the  terminus  of  every  account. 

63.  The  balance  sheet  of  proprietorship  is  a  summing-up  at 
some  particular  tune  of  all  the  elements  which  constitute  the 
wealth  of  some  person  or  collection  of  persons.     It  must  comprise : 

1.  The  values  of  assets,  consisting  of  property  and  claims,  to 

which  the  person,  or  collection  of  persons,  has  title. 

2.  The  values  of  the  claims  existing  against  the  assets  and 

which  must  be  satisfied  from  them. 

3.  The  value  of  the  residue  after  subtracting  (2)  from  (i)  and 

the  respective  proprietary  interests  in  that  value. 

(1)  =  the  sum  of  (2)  and  (3),  and  it  is  customary  to  place 
(2)  and  (3)  together  on  the  same  side  of  an  account. 

(2)  and  (3)  instead  of  being  of  the  same  nature  (as  is  sug- 
gested when  (3)  is  reckoned  among  the  "liabilities")  are  sharply 
antagonistic. 

64.  The  total  value  of  the  assets  (not  the  assets  themselves) 
is  divided  into  two  portions: 

The  portion  subject       )  ,  .,      ,  . 

_.,  .  ,  .      >   to  outside  claims. 

The  portion  not  subject ) 

30 


THE  BALANCE  SHEET  31 

s~> 

65.  There  are  two  ways  of  constructing  the  balance  sheet: 

1.  By  actual  investigation  of   quantities  and  prices  of  as- 
sets, and  of  extent  of  liabilities;  also  of  distribution  of  proprietor- 
ship.    In  inaugurating  a  system  of  accountancy  for  a  concern 
which  has  had  no  suitable  accounts  this  is  the  only  way.    It  may 
be  called  the  "inventory"  method. 

2.  By   tracing   the  changes  of  values  from  the  preceding 
balance  sheet  through  the  accounts,  and  collecting  the  resulting 
balances.    This  may  be  called  the  method  by  "derivation." 

The  former  method  is  entirely  independent  of  the  books  of 
account,  the  latter  is  entirely  dependent  on  them  and  on  their 
supporting  vouchers. 

66.  If  the  books  could  be  perfectly  kept,  the  results  would  be 
the  same  by  either  method,  just  as  the  location  of  a  ship  by  dead 
reckoning  should  theoretically  coincide  with  that  obtained  by 
observation  of  the  sun.    We  know  that  practically  they  always 
vary,  and  practically  no  system  of  accounts  is  so  minutely 
accurate  or  so  presciently  devised  as  to  take  account  of  all 
changes  and  contingencies. 

67.  In  practice,  the  two  methods  of  constructing  the  balance 
sheet  must  co-operate.    The  results  derived  from  the  current  ac- 
counts must  be  subjected  to  the  scrutiny  of  valuation  and  even 
if  they  are  purely  matter  of  account  like  indebtedness,  they 
should  be  verified  by  evidence  from  the  negotiant  whose  interest 
in  the  balance  is  adverse  to  ours,  or  from  an  impartial  source. 

68.  In  the  current  work  of  accounts  many  records  are  pro- 
visional and  intended  to  be  subject  to  adjustment  later.    As  the 
work  must  go  on  without  interruption,  there  is  necessarily  a  de- 
gree of  roughness  which  can  be  corrected  in  the  following  balance 
sheet  and  which  until  that  time  does  no  harm.    Hence  to  make 
the  balance  sheet  as  nearly  perfect  as  possible  adjustment  must 
be  made. 

69.  The  question  now  arises:  Should  these  adjustments  be 
effected  by  supplementary  entries  in  the  current  accounts  or 


32  THE  PHILOSOPHY  OF  ACCOUNTS 

should  they  be  ignored  in  the  regular  books  and  only  appear 
through  their  influence  on  the  balance  sheet? 

70.  I  should  decidedly  prefer  the  former  course  as  making 
the  results  of  valuation  and  derivation  coincide;  at  least  for  a 
balance  sheet  which  is  intended  for  the  information  of  the  pro- 
prietors.   Where  a  balance  sheet  or  report  is  required  by  some 
outside  authority,  it  may  be  that  the  point  of  view  required  is  so 
alien  to  that  assumed  in  the  accounts  themselves  that  no  adjust- 
ment is  practicable;  they  are  constructed  on  a  different  basis. 
Nevertheless,  even  in  this  case  the  specially  made  adjustments 
should  be  left  on  record  so  that  every  figure  in  the  report  may  be 
traced,  if  need  be,  to  some  figures  of  the  books. 

71.  While  every  account  is  tributary  to  the  balance  sheet,  yet 
it  is  very  seldom  that  each  account  is  represented  by  a  separate 
balance.    The  balance  sheet  is  almost  always  condensed  by 
grouping  into  a  single  item  many  balances  of  similar  nature. 
Thus,  if  the  proprietorship  has  among  its  assets  claims  against 
various  debtors,  they  are  not  set  down  at  length  in  the  balance  sheet : 


AB. 
CD. 

EF. 
etc. 


but  are  condensed  into  a  single  line: 

Sundry  Debtors $ 

72.  This  gives  a  more  comprehensive  view  of  the  business  at 
the  moment,  but  a  less  minute  one.     The  minuteness  is  attained 
by  means  of  a  separate  list,  or  schedule,  giving  in  as  full  detail 
as  may  be  required  the  facts  of  each  individual  account,  and 
showing   that   the   aggregate   balances   equal  the  single  item 
recorded  in  the  balance  sheet. 

73.  All  through  accountancy  runs  the  demand  for  minuteness 
and  the  contrary  demand  for  comprehensiveness.    They  are 
generally  satisfied  by  a  double  presentation.     In  organizing  this, 
it  is  most  satisfactory  to  make  the  condensed  balance  sheet  very 


THE  BALANCE  SHEET 


33 


condensed  so  as  to  give  a  bird's-eye  view  of  the  general  character 
of  the  business  and  to  go  to  the  other  extreme  in  the  expanded 
lists,  giving  all  details  that  can  be  required. 

74.  In  order  to  furnish  both  grades  of  information,  to  supply 
the  broad  results  of  the  condensed  balance  sheet  and  the  exact 
details  of  the  individual  accounts,  two  different  grades  of  ledger 
may  be  kept.     In  the  higher  or  more  condensed  ledger,  accounts 
are  kept  with  whole  groups  of  assets  or  liabilities  considered  as  a 
whole.    For  example,  if  there  are  among  the  assets  numerous 
investments  on  mortgage,  there  is  a  single  account  entitled 
"Mortgages"  in  the  general  ledger  while  each  separate  mort- 
gage has  a  separate  account  in  a  special  ledger  called  the 
"mortgage"  ledger.    The  balances  of  the  mortgage  ledger  al- 
ways equal,  when  aggregated  at  any  given  time,  the  balance  of 
the  Mortgage  account  in  the  general  ledger,  provided  this  latter  is 
fully  posted.    This  proviso  is  necessary  because,  while  the  mort- 
gage ledger  should  always  be  kept  posted  to  date,  the  general 
ledger  may  be  further  condensed  by  having  its  debits  and  credits 
entered  monthly  in  a  lump. 

75.  These  group  accounts  are  artificial.    The  members  have 
no  concert  of  action  and  no  joint  interests.    The  account  exists 
solely  for  the  convenience  of  the  proprietor. 

76.  We  now  give  a  condensed  balance  sheet  of  the  affairs  of 
one  James  Jones  in  the  form  ordinarily  used  in  this  country, 
Scotland,  and  continental  Europe: 


FIGURE  19 
BALANCE  SHEET  OF  JAMES  JONES 


Dr. 


Cr. 


Cash $3,506.74 

Merchandise 22,166.73 

Personal  Debtors 15,972.15 

Real  Estate 10,000.00 

$51,645.62 


Mortgage $4,000.00 


James  Jones 47,645.62 

$51,645.62 


34 


THE  PHILOSOPHY  OF  ACCOUNTS 


We  have  placed  the  abbreviations  "Dr."  and  "Cr."  over  the 
two  sides  which  is  the  customary,  though  not  invariable,  rule,  and 
we  must  interpret  those  expressions. 

77.  Looking  at  the  left-hand  side,  we  see  that  it  consists  of 
three  kinds  of  property,  and  a  collection  of  debtors.   The  property 
does  not  owe  Mr.  Jones  anything;  it  belongs  to  him.    Yet  the 
balances  of  property  are  on  what  we  agreed  to  call  the  debit  side; 
there  is  a  close  analogy  between  property  actually  in  possession 
and  that  which  someone  is  bound  to  deliver  to  you;  sometimes, 
as  in  case  of  a  bank  balance,  it  may  be  considered  either  property 
or  debt  receivable,  at  will.    Let  us,  therefore,  extend  the  mean- 
ing of  the  word  "debtor"  so  that  it  means,  when  speaking  of 
property,  "belonging  to,"  "the  property  of."    To  be  consistent, 
the  meaning  of  "creditor"  must  be  extended  correspondingly  so 
that  it  means  "owner  of,"  as  well  as  "owing  to." 

78.  With  these  extended  meanings,   we  may  rewrite   the 
balance  sheet  with  interpretations. 

FIGURE  20 

BALANCE  SHEET  OF  JAMES  JONES 
[Relations  of  Persons  and  Property  to  Him] 
Dr.  Cr. 

[Debtors  owing  him  or  property         [Creditors   claiming  from   him  or 
belonging  to  him]  his  actual  ownership] 


Cash  [belonging  to  him]. .  $3,506.74 

Merchandise 22,166.73 

Personal  Debtors  [owing 

him] 15,972.15 

Real  Estate  [belonging 

to  him] 10,000.00 


$51,645.62 


Mortgage  [owed  by  him]       $4,000.00 


James  Jones  [what  he  is 
worth  free  and  clear]. . . 


47,645-62 


$51,645.62 


79.  Another  form  of  presenting  the  affairs  of  Jones  is  just  the 
reverse  of  the  above.    Instead  of  being  the  account  of  everybody 


THE  BALANCE  SHEET 


35 


else  in  relation  to  Jones,  it  represents  Jones  as  he  stands  in  relation 
to  others;  exhibiting  him  as  creditor  for  what  he  owns  as  well  as 
for  what  is  due  him,  and  on  the  other  side  what  he  owes  as  well  as 
the  resultant  or  that  amount  which  he  does  not  owe.  (Figure  21.) 

80.  This  manner  of  presentation  is  mostly  used  hi  England — 
liabilities  and  ownership  on  the  left,  assets  on  the  right. 

81.  When  we  say  "in  account  with"  between  two  names,  we 
mean  that  the  former  is  the  debtor  on  the  Dr.  side  and  creditor  on 
the  Cr.  side.    Thus,  "  A  in  account  with  B,"  means  that  the  left- 
hand  side  of  the  account  is  contra  A  and  the  right  side  is  pro  A, 
while  "B  in  account  with  A"  reverses  the  sides. 

FIGURE  21 

JAMES  JONES 

[His  Relations  to  Persons  and  Property] 
Dr.  Cr. 

[Showing  how  he  is  indebted  and  what      [Showing    how    he   is    creditor   or 
he  is  worth]  owner] 


Mortgage  [he  owes] 


J.,OOO.OO 


[Balance  or] 

Net  Capital 47,645.62 

$51,645.62 


Cash  [he  owns] $3,506.74 

Merchandise  [he  owns] . .  22,166.73 
Personal  Debtors  [he 

being  the  creditor] ....  15,972.15 

Real  Estate  [he  owns] . . .  10,000.00 


$51,645.62 


82.  With  these  interpretations,  we  may  describe  these  two 
modes  as  follows : 

The  American  mode  represents: 

THE  UNIVERSE  IN  ACCOUNT  WITH  JONES 
The  English  mode  represents: 

JONES  IN  ACCOUNT  WITH  THE  UNIVERSE 


36  THE  PHILOSOPHY  OP  ACCOUNTS 

It  seems  to  me  that  the  American  mode  is  preferable,  for  the 
following  reason:  "Jones  in  Account  with  the  Universe"  has 
already  an  account,  like  the  one  in  Figure  14,  which  is  a  current 
account,  not  an  instantaneous  one;  one  which  does  not  give  a 
snapshot  of  his  status  but  the  history  of  how  he  arrives  at  that 
status.  It  seems  to  me  that  to  have  the  instantaneous  account 
and  the  historic  account  both  from  the  same  point  of  view  is  less 
logical  than  to  assemble  the  accounts  of  the  universe  including 
that  of  Jones  and  show  that  the  result  is  true. 

83.  But  the  mode,  or  order,  is  comparatively  unimportant;  the 
really  vital  thing  is  that  we  have  an  equation  weighing  assets  on 
the  one  side  against  liabilities  and  proprietorship  on  the  other. 
Jones  expresses  the  same  facts  whether  he  chooses  to  say: 

What  Belongs  to  me  +  What  is  Owing  to  me  = 
What  is  Claimed  from  me  +  What  is  Unclaimed 
or 

What  I  Owe  +  What  I  am  Worth  = 
What  I  Have  +  What  I  Claim 

whether  he  writes  in  the  third  person  or  in  the  first. 

84.  The  balance  sheet  has  limitations.    The  personality  of 
the  proprietor,  his  skill,  his  experience,  though  important  ele- 
ments of  his  capital,  can  never  be  brought  into  his  balance  sheets. 
They  cannot  be  bought  nor  sold  and  they  only  make  themselves 
manifest  through  the  services  which  he  does  sell. 

85.  The  assets  of  the  balance  sheet  consist  solely  of  material 
factors  outside  of  the  proprietor,  or  of  rights  over  others;  in  other 
words,  of  material  things  now  in  possession  and  of  material 
things  which  shall  be  in  possession. 

86.  The  "Me"  account,  which  almost  invariably  occurs,  re- 
ceives various  names,  and  these  indicate  a  feeling  of  difference 
between  this  account  and  the  others.    There  is  in  fact  a  profound 


THE  BALANCE  SHEET  37 

difference  as  between  soul  and  body;  between  any  man's  Ego 
and  Aliquis. 

The  most  usual  title  for  a  sole  proprietor's  account  is  probably: 

JAMES  JONES,  CAPITAL  ACCOUNT 
Another  form  is  simply: 

CAPITAL  [ACCOUNT] 

The  objection  to  this  is  that  all,  or  nearly  all,  of  the  assets  are 
capital  in  the  economic  sense;  the  man  or  the  group  of  men  use 
both  loan-capital  and  their  own  capital  for  their  profit. 

If  we  are  careful  to  discriminate  between  the  bookkeeper's 
"Capital"  account,  and  the  economist's  "capital,"  no  harm  is 
done.  If  "James  Jones'  Capital "  account  is  spoken  of,  this  con- 
fusion is  avoided.  So  it  is  if  we  borrow  from  the  economist  the 
terms,  "capital-balance"  or  "net  capital." 

87.  "Stock"  is  an  old-fashioned  word  for  the  same  meaning, 
but  is  now  seldom  used  except  as  to  corporations. 

88.  "James  Jones,  Proprietor,"  or  "James  Jones,  Proprie- 
tary," would  seem  appropriate  forms  of  speech  for  this  purpose, 
though  not  much  used. 

89.  The  arrangement  of  the  items  in  the  balance  sheet  is  of 
some  importance,  especially  if  the  list  is  voluminous.    There 
should  be  some  governing  principle  applied  throughout  if  possible. 
In  our  example  the  order  of  availability  has  been  followed,  or, 
as  it  might  be  termed,  the  order  of  liquidation.    Those  assets  are 
given  first  which  are  most  readily  convertible  into  cash.    On  the 
other  side,  those  liabilities  should  first  be  stated  which  must  first 
be  met,  and  lastly  the  proprietary  interests  which  are  entitled  to 
no  fixed  sum  but  to  "what  is  left." 

90.  It  is  not  certain  in  any  particular  case  that  this  order  of 
presentation  would  be  the  best  to  follow.    In  an  industrial  enter- 
prise where  it  was  thought  that  productivity  or  earning  power 
was  more  important  than  readiness  hi  debt-paying,  it  might  be 

79503 


38  THE  PHILOSOPHY  OF  ACCOUNTS 

that  the  fixed  plant  was  entitled  to  the  first  place  among  the  assets 
and  that  the  cash  on  hand  would  be  placed  at  the  end  as  the 
least  productive  of  assets.  But,  at  any  rate,  some  principle  of 
arrangement  is  better  than  haphazard. 

91.  Let  us  now  assume  that  James  Jones,  whose  balance  sheet 
we  have  exhibited,  associates  with  himself  William  Smith  as  a 
partner  under  the  firm  name  of  Jones  &  Smith;  also  that  Smith 
contributes  a  net  proprietary  interest  of  $23,822.81,  viz.,  the 
following  assets: 

Cash $5,082.34 

Merchandise 1 7,082.65 

Personal  Debtors 8,123.17 

Bills  Receivable 7,000.00 

$37,288.16 

subject  to  the  following  liabilities: 

Bills  Payable $8,000.00 

Personal  Creditors 5.465.35 

$i3,465-35 

92.  The  firm  of  Jones  &  Smith  is  a  unit  hi  mercantile  affairs. 
The  assets  belong  now  to  both  jointly;  the  debts  have  been  as- 
sumed by  both  and  both  are  responsible  for  their  payment. 

A  new  business  entity  has  been  created  distinct  from  Jones 
and  from  Smith ;  it  is  a  collective  unity,  but  a  real  one.  Professor 
Irving  Fisher  in  his  "Nature  of  Capital  and  Income"  says  that  it 
is  a  "  fictitious  person  holding  certain  assets  and  owing  them  all 
out  again  to  real  persons."  In  this  I  think  he  has  been  misled  by 
the  lazy  habit  of  bookkeepers  in  calling  all  the  credit  balances 
liabilities,  although  they  know  that  some  of  those  balances  are 
not  liabilities.  Even  admitting  that  there  is  a  fictitious  entity  it 
owes  nothing  to  the  real  owners.  It  merely  is  a  composite  owner- 
ship which  again  is  owned  in  various  shares  by  real  owners,  and  has 
nothing  to  do  with  debt. 

93.  The  copartnership  of  Jones  &  Smith  has  a  status  at  this 
moment;   it  therefore  has  a  balance  sheet.    In  this,  the  pro 


THE  BALANCE  SHEET 


39 


prietorship  may  be  represented  jointly  or  distributively,  as  may 
be  preferred.  The  former  would  be  preferable  for  an  outward 
balance  sheet,  such  as  to  a  mercantile  agency,  or  in  applying  for 
credit;  the  latter  for  information  of  the  partners.  (Figures  22 
and  23.) 

FIGURE  22 
BALANCE  SHEET  OP  JONES  &  SMITH 


Cash $8,589.08 

Merchandise 39>249-38 

Bills  Receivable 7,000.00 

Personal  Debtors 24,095.32 

Real  Estate 10,000.00 

$88,933.78 


Bills  Payable $8,000.00 

Personal  Creditors 5.465.35 

Mortgage  Payable 4,000.00 

Jones  &  Smith  (the  firm's 

capital) 71,468.43 

$88,933.78 


FIGURE  23 
BALANCE  SHEET  OF  JONES  &  SMITH 


Cash $8,589-08 

Merchandise S9.249-38 

Bills  Receivable 7,000.00 

Personal  Debtors 24,095.32 

Real  Estate 10,000.00 

$88,933-78 


Bills  Payable $8,000.00 

Personal  Creditors 5.465.35 

Mortgage  Payable 4,000.00 

James  Jones 47,645.62 

William  Smith 23,822.81 

$88,933.78 


94.  Let  it  be  supposed  that  Messrs.  Jones  &  Smith,  instead 
of  a  partnership,  had  preferred  to  form  a  company,  named  the 
"Jones  Mercantile  Company."  They  consider  that,  as  the  actual 
value  of  their  joint  proprietorship  is  over  $71,000,  it  would  be 
quite  proper  to  capitalize  it  at  $60,000,  in  600  shares  of  $100 
each.  Nevertheless,  there  is  a  total  proprietorship  of  $71,468.43, 
as  before,  all  of  which  must  be  represented  in  some  form. 

In  order  to  represent  both  the  amount  of  the  capitalization 
and  the  true  proprietary  value,  we  divide  the  total  proprietorship 
into  two  parts: 


THE  PHILOSOPHY  OF  ACCOUNTS 


Capital:  par,  or  face  value  of  shares $60,000.00 

Surplus:  excess  of  real  value  over  par 11,468.43 

Their  sum  is  the  real  proprietorship $71,468.43 

The  resulting  balance  sheet  would  be: 

FIGURE  24 
BALANCE  SHEET  OF  THE  JONES  MERCANTILE  COMPANY 


Cash $8,589.08 

Merchandise 39,249.38 

Bills  Receivable 7,000.00 

Personal  Debtors 24,095.32 

Real  Estate 10,000.00 

$88,933-78 


Capital  Stock $60,000.00 

Surplus 11,468.43 

Bills  Payable 8,000.00 

Personal  Creditors 81465. 35 

Mortgage  Payable 4,000.00 

$88,933-78 


95.  The  anomaly,  not  infrequently  occurring,  of  ranking  the 
capital  and  surplus  before  the  liabilities  may  originate  in  the  fact 
that  a  new  corporation  begins  with  capital  stock  and  assets  before 
contracting  liabilities.    It  would  seem  more  rational  to  place  the 
proprietary  accounts  after  the  liabilities. 

96.  Another  kind  of  business  entity  is  now  introduced,  a 
collective  body  but  still  personal  and  real.    The  fictitious  feature 
is  the  nominal  or  par  value  of  shares.    Jones  holds  400  shares  out 
of  600;  this  does  not  express  the  value  of  the  shares  but  merely 
the  proportion  which  they  bear  to  the  entire  proprietorship. 
The  true  value  of  Jones'  shares  is  not  !•-§-§•  of  $60,000,  but  f-f-g-  of 
the  entire  $71,468.43,  or  whatever  the  true  value  may  turn  out  to 
be.    The  book  "value  of  each  share  would  be  $119.11405  and  this 
would  vary  with  the  ups  and  downs  of  business. 

97.  A  distinguished  publicist,  Edward  M.  Shepard,  has  re- 
cently argued  that  it  would  be  better  if  no  nominal  value  at  all 
were  attached  to  shares  of  stock,  if  each  merely  represented  the 
ff-J-jj-  or  the  roVo-  Pal>t  of  the  entire  proprietorship.     There  could 
then  be  no  such  thing  as  watering,  or  its  opposite. 

98.  As  it  is,  however,  the  true  net  value  of  the  concern  is 
artificially  split  into  two  parts  in  order  to  exhibit  the  nominal 


THE  BALANCE  SHEET  4! 

capitalization.  This  is  convenient  for  several  reasons.  The  law 
generally  strives  to  make  the  nominal  capitalization  conform  to 
the  cash  originally  invested.  The  nominal  value  of  the  share  is 
a  convenient  basis  for  stating  dividends  by  percentage.  In  some 
kinds  of  corporations,  also,  as  insurance  companies,  the  value  is 
required  to  be  kept  up  to  at  least  the  par  of  capitalization.  In 
others,  as  national  banks,  shareholders  are  guarantors  of  solvency 
up  to  the  par  value  of  their  shares,  after  those  shares  have  fallen 
to  zero. 

99.  The  selling  value  of  the  shares  should  be,  apparently,  the 
book  value  of  the  assets  minus  the  liabilities.    Yet,  no  matter 
how  accurately  the  assets  may  be  valued  and  the  liabilities 
ascertained,  it  is  very  seldom  that  the  selling  price  corresponds 
to  the  book  value.    The  reason  may  be  that  while  the  assets  are 
sufficient  for  liquidation  at  the  book  value,  they  are  not  handled 
with  the  success  which  will  earn  the  average  rate  of  dividend. 
This  may  be  from  lack  of  skill,  from  unfortunate  location,  or  some 
other  disadvantage.    But  the  purchaser  is  trying  to  buy  future 
income,  and  will  not  invest  unless  he  sees  a  prospect  of  getting  it. 
On  the  other  hand,  the  management  of  the  business  may  be  so 
successful  that  its  earning  power  is  greater  than  the  average  per 
dollar  and  if  this  is  appreciated  it  will  command  a  premium 
greater  than  the  surplus. 

100.  The  two-sided  debit  and  credit  form  is  not  invariably 
the  best  for  the  balance  sheet.    To  place  the  assets,  liabilities,  and 
net  proprietorship  one  below  the  other  is  a  very  clear  way  of  pre- 
sentation, and  admits  of  various  orders  of  sequence,  and  of  any 
process  of  summation. 

101.  We  have  said  that  there  are  certain  assets,  such  as  skill 
and  experience  which,  in  practice,  never  appear  in  the  balance 
sheet.    As  a  consequence  there  may  be  persons  or  business  enti- 
ties which  have  no  balance  sheet.    An  individual  receiving  a 
salary  for  his  skill  in  some  particular  function  and  expending  it 
exactly  as  fast  as  it  is  received,  needs  no  balance  sheet.    His  skill 


42  THE  PHILOSOPHY  OF  ACCOUNTS 

is  a  non-ledger  asset,  and  he  accumulates  nothing  concrete.  If 
he  does  "get  ahead"  or  "get  behind"  to  a  slight  extent  he  will 
have  assets  and  liabilities  which  will  give  rise  to  a  balance  sheet; 
but  this  will  be  insignificant  in  comparison  with  the  non-ledger  as- 
sets of  personality  +  skill.  Nevertheless  he  requires  outlay  and 
income  accounts,  for  he  receives  and  gives  services  emanating 
from  -these  non-balance  sheet  assets. 

FIGURE  25 

Net  Worth  of  Investment $71,468.43 

Liabilities 1 7,465.35 

Total  Assets $88,933.78 

DETAILED  BALANCE  SHEET 

Capital  Stock,  600  shares  of  $100 $60,000.00 

Surplus ii  ,468.43 

Net  Value  of  Investment $71,468.43 

Assets : 

Cash $8,589.08 

Merchandise 39,249.38 

Bills  Receivable 7,000.00 

Personal  Debtors 24,095.32 

Real  Estate 10,000.00 

Total  Assets $88,933.78 

Liabilities: 

Bills  Payable $8,000.00 

Personal  Creditors 5.465.35 

Mortgage  Payable 4,000.00 

Total  Liabilities $17.465.35 

102.  A  municipal  corporation  is  in  a  similar  position.  Its 
principal  asset  is  its  power  of  confiscating  the  property  of  its  mem- 
bers and  others  within  its  limits,  through  taxation,  to  an  extent 
which  cannot  be  valued,  but  which  is  measured  by  the  needs,  as 
legally  ascertained,  of  its  members.  In  theory  it  is  merely  an 
agent  for  converting  property  into  service.  It  has  assets  and 
some  of  them  can  be  valued;  but  the  most  important  ones,  like 


THE  BALANCE  SHEET  43 

highways,  yield  public  and  non-measurable  service.  It  has  lia- 
bilities also;  but  no  balance  can  be  struck  between  its  assets  and 
its  liabilities  which  will  define  its  status  to  any  instructive  pur- 
pose. Lists  of  its  assets  so  far  as  ascertainable  are  valuable;  lists 
of  its  liabilities  are  even  more  so;  but  its  proprietorship  cannot 
be  reduced  to  dollars  and  cents  and  hence  its  balance  sheet  is  non- 
existent. The  highest  function  of  municipal  bookkeeping  is  the 
co-ordination  of  revenue  and  expenditure,  of  sacrifice  and  service. 
(See  Maclnnes,  on  Municipal  Balance  Sheets.) 

103.  Having  thus  established  the  foundation  of  the  balance 
sheet,  we  will  proceed  to  the  analysis  of  its  components,  assets, 
liabilities,  and  proprietorship,  all  three  of  which  are  usually  but 
not  invariably  present.    Of  these  the  most  concrete  and  tangible 
are  the  properties  and  rights  constituting  the  assets;  next  are  the 
deductions  or  reservations  therefrom  known  as  liabilities,  and 
finally,  existing  only  as  a  relation,  is  the  still  more  abstract  con- 
ception of  proprietorship. 

104.  The  credit  side  gives  the  distribution,  not  of  the  actual 
assets  but  of  their  value,  while  the  debit  side  divides  them  accord- 
ing to  their  nature.    No  one  asset  need  correspond  to  any  par- 
ticular liability.    The  assets  and  liabilities  taken  together,  the 
former  being  tangible  and  the  latter  definite,  constitute  the 
specific  values  which  are  the  subject  of  the  specific  accounts. 


CHAPTER  VI 

PHASES  OF  THE  ASSETS 

THINGS  AND  RIGHTS — INTERCONVERTIBLE — UNCOMPLETED  CONTRACTS 
— EMBODIMENT  or  SERVICES  GIVEN — STORAGE  OF  SERVICES  TO  BE 
RECEIVED — CAPITAL — INVESTMENT 

105.  The  specific  values  on  the  asset  side  of  the  balance  sheet 
are  of  two  classes: 

1.  Things. 

2.  Rights. 

Or  we  may  say: 

1 .  Things  belonging  to  us. 

2.  Debts  owing  to  us. 

Or  again: 

1.  Possessions. 

2.  Expectations. 

We  shall  see  upon  examination  that  these  classes  imperceptibly 
blend  into  each  other  and  that  every  asset  may  be  looked  upon 
either  as  a  "thing"  or  as  a  "right." 

Possession  of  a  thing  is  merely  the  right  to  use  it  and 
control  it. 

Therefore  all  our  "things"  may  be  looked  upon  as  merely 
rights  of  dominion.  We  look  upon  our  cash  as  a  thing  and  as 
one  of  our  most  concrete  assets.  Yet  the  greater  part  of  it  is 
usually  in  bank  deposits,  which  are  merely  the  right  to  receive 
money  on  demand  or  to  transfer  such  right  to  anyone  who  will 
accept  it  instead  of  money.  But  excluding  bank  deposits  as  not 
being  money,  we  may  hold  bank  notes  or  greenbacks.  These 
are  nothing  but  printed  agreements  conferring  the  right  to  re- 

44 


PHASES  OF  THE  ASSETS  45 

ceive  money,  which  is  seldom  called  for.  Finally,  the  coin,  even 
if  of  the  standard  metal,  is  value  in  possession.  Yet,  unless  we 
are  jewelers,  we  do  not  use  it.  We  prize  it  simply  because  we 
have  the  right  under  the  law  to  satisfy  contracts  by  parting 
with  it. 

106.  Thus  things  convert  themselves  into  rights,  and  the  re- 
verse is  true:  rights  are  convertible  into  things.    Rights  are  but 
the  future  tense  of  things.    Not  only  this  but  they  are  almost  al- 
ways secured  by  things.    The  personal  indebtedness  which  we 
list  in  our  assets  is  generally  based  upon  the  goods  which  were 
ours  but  which  we  have  sold.    We  feel  that  they  are  still  in 
existence  as  morally  ours  until  paid  for.    We  have  trusted  the 
purchaser  for  the  reason  that  he  owns  these  and  other  goods 
which  will  more  than  satisfy  our  claim.    Thus  all  rights  rest 
ultimately  upon  things,  either  present  or  expected. 

107.  But  rights  are  sometimes  materialized  into  a  kind  of 
artificial  things,  especially  when  they  are  evidenced  by  some  ma- 
terial thing,  such  as  a  written  document.    A  mere  debt  is  seldom 
thought  of  as  a  thing  in  possession,  while  a  note,  which  is  a  written 
acknowledgment  of  the  same  debt,  is  looked  upon  as  some- 
thing valuable  in  itself,  because  it  can  be  touched  and  handled. 
Especially  is  this  true  of  bonds,  mortgages,  etc.,  formal  docu- 
ments, usually  transferable,  which  create  the  illusion  that  they 
are  actual  property,  not  merely  the  symbol  of  a  debt. 

On  the  other  hand,  things  are  sometimes  personified  into 
personal  debtors,  and  the  whole  system  of  assets  and  liabilities  is 
converted  into  a  set  of  debts  either  receivable  or  payable.  It  is 
feigned  that  the  Cash  account  is  the  account  of  the  cashier;  he  is 
indebted  for  all  the  receipts  and  credited  for  all  the  payments. 
Similarly  the  warehouseman  is  regarded  as  owing  for  all  the 
merchandise,  the  land  agent  for  all  the  real  estate;  regardless  of 
the  fact  that  there  is  no  actual  indebtedness,  since  these  cus- 
todians take  no  title  to  the  things.  Neither  the  shepherd  nor  his 
dog  is  in  debt  for  the  sheep. 


46  THE  PHILOSOPHY  OF  ACCOUNTS 

108.  These  extremists,  who  have  tried  on  the  one  hand  to 
convert  all  assets  into  things,  and  on  the  other  hand  to  reduce  all 
things  to  personal  debts,  have  had  long  discussions,  especially  in 
Italy,  dividing  themselves  into  the  two  camps  of  the  materialists 
and  the  personalists.    Apparently  it  has  not  occurred  to  these 
controversialists  that  in  truth  some  of  the  assets  are  of  the  one 
and  some  of  the  other  nature,  and  that  many  may  be  looked  at  in 
either  phase;  furthermore  that  so  long  as  the  nature  of  the  asset 
and  its  form  of  account  are  understood,  it  is  needless  to  twist  it 
into  the  shape  of  some  other  asset.    To  seek  the  truth  and  follow 
the  facts  is  safer  than  to  compress  everything  into  the  mold 
of  a  "theory." 

109.  Rights  always  arise  from  uncompleted  contracts.     No 
man  owes  you  unless  there  has  been  a  contract,  tacit  or  expressed, 
oral  or  written,  for  him  to  give  you  something  and  for  you  to 
give  him  something.    If  one  of  you  has  fulfilled  his  part  of  the 
contract,  that  one  has  acquired  a  right  and  the  other  has  incurred 
an  obligation.    The  contract  may  be  a  mere  understanding  with- 
out words,  or  it  may  be  duly  signed,  sealed,  and  witnessed. 

no.  In  another  aspect  all  assets  are  the  embodiment  of  ser- 
vices previously  given;  and  in  still  another  they  are  a  storage  of 
services  to  be  received.  Someone  must  have  given  labor  in  order 
to  produce  any  wealth;  but  if  it  will  not  in  the  future  command 
the  services  of  labor,  or  save  the  expenditure  of  labor,  or  of  its 
embodied  results,  it  is  worthless  and  not  wealth  at  all. 

in.  Yet  the  values  resulting  from  these  two  aspects  are  only 
approximately  equal.  On  the  one  hand,  the  services  which  were 
given  may  have  been  sold  for  more  or  less  than  a  just  price  as 
settled  by  competition;  consequently  the  assets  received  for  the 
services  may  be  less  or  more  than  the  future  services  receivable. 
The  whole  economic  struggle  (reducing  everything  to  terms  of 
service)  is  to  sell  one's  own  services  high  and  buy  the  services 
of  others  cheap.  On  the  other  hand,  a  disservice  (to  use  Pro- 
fessor Fisher's  word)  may  have  occurred  through  various  causes, 


PHASES  OF  THE  ASSETS  47 

so  that  the  services  once  anticipated  appear  impossible  of  entire 
realization.  It  must1  be  observed  that  the  aspect  of  assets  as  the 
present  worth  of  future  services  is  entirely  based  upon  opinion, 
while  the  aspect  which  regards  them  as  the  resultant  of  services 
given  is  based  upon  facts. 

112.  Capital  is  defined  by  economists  as  that  portion  of  wealth 
which  is  set  aside  for  the  production  of  additional  wealth.    In 
the  balance  sheet  of  a  business  concern,  frequently,  all  the  assets 
are  capital,  being  employed  as  tools  for  its  operations.    There 
may  be  other  assets,  called  "investments,"  where  the  actual 
handling  of  the  tools  is  turned  over  to  someone  else  and  the 
value  receivable  for  the  services  is  returned  in  cash  or  other  as- 
sets.   This  is  exemplified  in  the  ownership,  by  corporations,  of 
the  shares  or  bonds  of  other  corporations.    The  physical  assets 
underlying  these  securities  are  used  as  tools  by  the  corporation 
issuing  them,  rather  than  by  the  one  owning  them.    Yet  in  a 
remoter  sense  such  vicarious  assets  may  be  considered  as  capital; 
for  example,  their  possession  may  be  a  safeguard  against  some 
contingency  or  a  reserve  of  strength.    Hence  it  is  easy  to  accept 
the  view  of  Professor  Irving  Fisher,  that  all  assets  are  capital.* 

113.  To  summarize  this  chapter,  the  assets  comprising  the 
debit  side  of  a  balance  sheet  may  be  considered  in  one  or  more 
of  the  following  ways: 

1.  As  things  possessed,  directly  or  indirectly,  or  physical 

assets. 

2.  As  rights  over  things  and  persons,  for  use,  for  services, 

or  for  exchange. 

3.  As  incomplete  contracts,  whereof  our  part  has  been  per- 

formed in  whole  or  in  part;  or  contractual  assets. 

4.  As  the  result  of  services  previously  given,  or  cost. 

5.  As  the  present  worth  of  expected  services  to  be  received. 


*  In  the  "summation  of  capital, "  Professor  Fisher  eliminates,  by  cancellation,  the  securi- 
ties of  one  concern  held  by  another,  as  they  cannot  furnish  capital  to  both;  which  approxi- 
mates to  the  distinction  in  the  text. 


48  THE  PHILOSOPHY  OF  ACCOUNTS 

6.  As  capital  for  the  conduct  of  business  operations. 

7.  As  investment  in  the  hands  of  another  who  uses  it  as 

capital. 

114.  The  special  case  in  which  certain  assets  are  devoted  to 
the  payment  of  certain  liabilities  will  be  treated  under  liabilities 
in  the  next  chapter. 


CHAPTER  VII 
PHASES  OF  LIABILITIES 

NEGATIVE  ASSETS — POSTPONED  DECREASE  OF  ASSETS — RIGHTS  OF 
OTHERS — UNCOMPLETED  CONTRACTS — LOAN  CAPITAL — ASSETS 
CORRESPONDING  TO  CERTAIN  LIABILITIES — SOME  SEEMING  LIABILI- 
TIES, ACTUALLY  OFFSETS — LIABILITIES  Do  NOT  SHRINK 

115.  As  we  pass  from  the  asset  side  of  the  balance  sheet  we 
seem  to  leave  the  actual  and  concern  ourselves  with  the  ideal; 
the  objective  gives  place  to  the  subjective.    While  the  asset  side 
contains  concrete  actualities,  the  other  side  deals  with  the  distri- 
bution of  these  actualities  among  those  who  have  the  title  to  them 
and  those  who  hold  claims  against  them,  the  liabilities. 

1 1 6.  In  algebraic  language  we  may  say  that  liabilities  are 
negative  assets  and  that  proprietorship  is  measured  by  the  alge- 
braic sum  of  all  the  assets  positive  and  negative. 

Another  way  of  expressing  this  phase  is  that  the  liabilities  are 
postponed  decreases  of  the  assets;  a  future  diminution  having 
the  same  effect  on  the  net  proprietorship  as  a  present  diminution. 

117.  The  liabilities  may  to  some  extent  be  looked  upon  in 
aspects  corresponding  to  those  stated  for  the  assets,  although 
they  never  represent  concrete  property. 

As  rights,  they  are  the  rights  of  others  against  us  and  our 
property,  just  as  the  assets  are  our  right  against  others. 

Considered  as  uncompleted  contracts,  they  are  those  in  which 
our  part  of  the  contract  is  the  part  unfulfilled. 

As  capital,  they  represent  that  portion  of  the  total  capital 
which  has  been  furnished  by  others,  or  loan-capital. 

118.  Ordinarily  there  is  no  designation  of  certain  assets  as 
destined  to  meet  certain  liabilities,  but  any  or  all  of  the  assets 
may,  upon  default,  be  expropriated  to  a  sufficient  extent  to  pay 

4  49 


50  THE  PHILOSOPHY  OF  ACCOUNTS 

any  liability.  The  word  "assets,"  meaning  "enough"  or  "suffi- 
cient," suggests  this  view  of  their  nature  from  the  point  of  view 
of  the  creditor.  There  are  cases,  however,  where  definite  assets 
are  paired  off  against  definite  liabilities,  in  such  a  way  that  these 
particular  assets  cannot  be  parted  with  unless  the  liability  (which 
is  said  to  be  "  secured  ")  has  first  been  paid.  A  familiar  example 
is  the  mortgage  on  real  estate.  The  title  is  in  the  owner;  the  real 
estate  stands  in  his  balance  sheet  as  an  asset;  he  has  full  dominion 
over  it;  he  can  collect  the  rent  from  it  and  can  even  sell  the  prop- 
erty subject  to  the  paramount  rights,  or  lien,  of  the  mortgage. 
The  status  of  the  property  would  be  as  follows,  for  example: 


Value  of  Real  Estate $10,000 


$10,000 


Mortgage $4,000 

Equity 6,000 

$10,000 


The  true  proprietorship  in  the  real  estate  is  the  "equity"  in 
the  above  balance  sheet,  and  this  is  all  that  the  owner  can  really 
sell.  Hence,  instead  of  calling  the  entire  $10,000  an  asset  and 
the  $6,000  a  liability  he  sometimes  prefers  to  eliminate  the 
liability  and  treat  the  equity  as  a  net  asset. 


Equity  in  Real  Estate: 
Value  $10,000,    Mortgage 
$4,000 $6,000 


The  word  "equity"  in  the  balance  sheet  is  taken  in  the 
proprietary  sense;  here,  in  the  sense  of  an  asset. 

119.  Similarly,  other  assets  are  pledged  to  the  satisfaction  of 
liabilities  and  usually  some  steps  are  taken  to  prevent  the  owner 
from  alienating  the  asset  to  the  detriment  of  the  pledgee.  The 
United  States  government  takes  from  national  banks  their  bonds 
as  security  for  the  redemption  of  circulating  notes  guaranteed 
by  the  government. 


PHASES  OF  THE  LIABILITIES  51 


Assets 


U.  S.  Bonds  to  secure  Cir- 
culation. . 


Liabilities 


Circulation      (Notes     out- 


standing) , 


The  ordinary  loan  on  collateral  is  another  example  of  an  asset 
paired  against  a  liability. 

120.  While  there  is  this  correlation  between  assets  and  lia- 
bilities taken  in  pairs,  there  is  seldom  exact  identity  of  value. 
The  asset  is  always  taken,  or  intended  to  be  taken,  larger  than  the 
liability,  for  prudential  reasons;  so  that  there  is  a  residue  above 
the  liability  such  as  the  equity  in  the  mortgaged  property  or  the 
margin  in  the  loan  on  collateral. 

121.  Many  seeming  liabilities  are  more  properly  defined  as 
deductions  from  certain  correlated  assets;  of  this  we  shall  speak 
more  fully  under  the  head  of  offsets. 

122.  While  assets  may  shrink  in  value,  that  shrinkage  affects 
the  proprietorship,  never  the  liabilities,  which  must  be  regarded 
as  rigid  and  inelastic. 


CHAPTER  VIII 
PROPRIETORSHIP 

PHASES  OF  PROPRIETORSHIP — As  RIGHTS — DISTINCTION  BETWEEN 
LIABILITIES  AND  PROPRIETORSHIP — As  SERVICE — As  CAPITAL; 
OWN  CAPITAL — FICTITIOUS  METHODS  OF  PRESENTATION  OF  ASSETS, 
LIABILITIES,  AND  PROPRIETORSHIP — CASH  THEORY — "THE  BUSI- 
NESS" THEORY 

123.  The  proprietorship  may,  like  the  liabilities,  be  viewed 
in  the  same  phases  as  the  assets,  all  except  that  of  "things." 
Where  there  are  any  liabilities,  no  list  of  things  can  be  drawn  up 
which  represents  the  proprietorship  because  the  liabilities  may  be 
canceled  by  disposing  of  whatever  assets  are  chosen  for  dis- 
posal by  the  proprietor.    But  if  there  are  no  liabilities  whatever, 
the  sum  of  the  assets  is  the  total  proprietorship.    Let  us  agree 
in  the  balance  sheet  at  Figure  19,  that  the  mortgage  shall  be 
stricken  out  and  the  value  of  the  equity  alone  be  carried  as  an 
asset.   There  being  then  no  liabilities,  the  proprietorship  is  simply 
the  sum  of  the  assets  and  the  balance  sheet  needs  but  one  side: 

Cash $3,506.74 

Merchandise 22,166.73 

Personal  Debtors 15,972.15 

Equity  in  Real  Estate 6,000.00 

Capital $47,645.62 

The  last  line  is  proprietorship;  it  is  capital  in  both  senses,  the 
bookkeeping  sense  and  the  economic  sense. 

124.  As  "rights,"  however,  the  proprietorship  may  be  viewed. 
The  assets  being  regarded  as  composed  of  rights  against  others 
and  the  liabilities  as  others'  rights  against  us,  the  excess  of  rights 
in  our  favor  is  the  proprietorship. 

52 


PROPRIETORSHIP  53 

125.  Thus  the  right-hand  side  of  the  balance  sheet  is  entirely 
composed  of  claims  against  or  rights  over  the  left-hand  side. 
"  Is  it  not  then  true,"  it  will  be  asked,  "  that  the  right-hand  side  is 
entirely  composed  of  liabilities?  "    The  answer  to  this  is  that  the 
rights  of  others,  or  the  liabilities,  differ  materially  from  the 
rights  of  the  proprietor,  in  the  following  respects: 

1.  The  rights  of  the  proprietor  involve  dominion  over  the 

assets  and  power  to  use  them  as  he  pleases  even  to 
alienating  them,  while  the  creditor  cannot  interfere  with 
him  or  them  except  in  extraordinary  circumstances. 

2.  The  right  of  the  creditor  is  limited  to  a  definite  sum  which 

does  not  shrink  when  the  assets  shrink,  while  that  of 
the  proprietor  is  of  an  elastic  value. 

3.  Losses,  expenses,  and  shrinkage  fall  upon  the  proprietor 

alone,  and  profits,  revenue,  and  increase  of  value  benefit 
him  alone,  not  his  creditors. 

For  these  reasons  the  proprietary  interest  cannot  be  treated 
like  the  liabilities  and  the  two  branches  of  the  right-hand  side  of 
the  balance  sheet  require  distinctive  treatment. 

126.  Considered  as  the  effect  of  service,  the  proprietorship 
is  the  expression  of  how  much  more  service  has  been  given  than 
received.     Considered  as  the  embodiment  of  future  service  it 
represents  the  net  value  of  the  service  which  the  proprietor  has  a 
right  to  expect  without  giving  any  further  service  of  his  own. 

127.  Considering  all  the  assets  as  capital,  the  proprietorship 
is  that  portion  (in  value)  of  the  capital,  which  the  proprietor 
furnishes  as  distinguished  from  the  portion  which  he  induces 
others  to  place  in  his  hands  for  utilization,  or  the  liabilities. 

128.  Before  collecting  the  various  phases  of  the  assets,  lia- 
bilities, and  proprietorship  into  a  systematic  whole,  it  may  be  well 
to  mention  two  somewhat  fictitious  methods  of  presentation,  each 
introducing    an    intermediary    element   which    disappears    by 
cancellation. 


54  THE  PHILOSOPHY  OF  ACCOUNTS 

129.  In  the  cash  theory,  every  transaction  is  supposed  to  pass 
through  the  phase  of  cash.    There  is  no  direct  exchange  of  any 
asset  for  another  asset,  but  it  is  assumed  that  cash  is  received  for 
the  former  and  at  once  paid  for  the  latter.    Thus  a  sale  of  mer- 
chandise on  credit  is  represented  as  a  sale  for  cash  accompanied 
by  a  loan  of  the  cash  to  the  purchaser. 

Purchaser/Mdse 
becomes 

Cash/Mdse 
Purchaser/ Cash 

130.  A  very  large  number  of  the  transactions  are  genuinely 
cash,  and  it  is  evident  that  the  others  may  be  separated  into  two 
each,  one  involving  a  receipt  of  cash  and  the  other  an  expendi- 
ture.   Without  at  present  dwelling  on  this,  we  may  conclude  that 
any  asset,  except  cash  itself,  may  be  considered  to  have  cost 
money,  and  that  any  liability  or  proprietorship  may  be  considered 
as  having  procured  money  or  as  being  sources  of  money.    The 
debit  side  of  the  balance  sheet  is  transformed  into  a  statement 
of  cash  paid,  and  the  credit  side  into  a  statement  of  cash  received 
— a  reversed  cash  statement.* 

131.  Taking  the  figures  of  Figure  23  we  thus  transform  them 
into  the  following: 

FIGURE  26 
BALANCE  SHEET  OF  JONES  &  SMITH 


For 

Proceeds  of  Cash  Paid 
Merchandise  Sio.  2/10.^8 

Sources  of  Cash  Re 
From  James  Jones  

ceived 

$47,645.62 
23,822.81 
8,000.00 

5,465-35 
4,000.00 

Bills  Receivable  .... 
Personal  Debtors  .  .  . 
Real  Estate  

7,000.00 
24,095.32 
10,000.00 
8,589.08 

"     William  Smith.  .  .  . 
"     Bills  Payable  
"     Personal  Creditors 
"     Mortgage  Payable 

Balance  unpaid  .... 

$88,933.78 

$88,933-78 

*  For  a  special  study  of  the  Cash  account,  see  Appendix,  Monograph  A. 


PROPRIETORSHIP 


55 


Jones  and  Smith  are  supposed  to  have  paid  in  to  the  firm's 
treasury  the  sums  which  each  was  worth,  and  the  firm  to  have 
also  borrowed  the  sums  of  $8,000,  $5,465.35,  and  $4,000,  as 
stated.  The  firm  then  bought  with  the  cash  thus  acquired  the 
assets  of  each  partner,  which  restored  to  each  enough  to  replace 
in  his  private  treasury  the  cash  he  had  contributed  and  also  to 
pay  the  individual  debts,  which  are  now  replaced  by  the  firm's 
indebtedness.  There  also  remains  unexpended  a  cash  balance 
of  $8,589.08. 

132.  The  application  of  the  cash  theory  to  the  corporate 
balance  sheet  (Figure  24)  may  serve  to  explain  several  things: 

FIGURE  27 
JONES  MERCANTILE  COMPANY 


Capital  and  Liabilities 

[Cash  received  from] 

Capital  Stock $60,000.00 

Surplus 1 1,468.43 

Bills  Payable 8,000.00 

Personal  Creditors 5,465-35 

Mortgage  Payable 4,000.00 

#88,933.78 


Assets 

[Cash  paid  for] 

Merchandise $39,249.38 

Bills  Receivable 7,000.00 

Personal  Debtors 24,095.32 

Real  Estate 10,000.00 

Cash  Balance 8,589.08 

$88,933.78 


The  facts  for  which  this  offers  a  plausible  explanation  are 
the  following: 

1.  That  the  English  accountants  usually  place  the  assets 

(cash  paid)  on  the  right-hand  side  and  vice  versa,  this 
being  the  natural  form  of  a  cash  statement. 

2.  That,  as  remarked  in  Chapter  IV,  the  proprietary  ac- 

counts usually  come  before  the  liabilities,  companies 
being  formed  by  first  paying  in  cash  for  shares,  in  form 
at  least.  Often  this  is  effected  by  the  giving  of  checks 
which  offset  each  other  or  are  indorsed  back,  but  the 
form  is  generally  observed. 


THE  PHILOSOPHY  OF  ACCOUNTS 


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PROPRIETORSHIP  57 

3.  That  the  cash  stands  last  in  the  list  of  assets,  it  being 
regarded  as  a  balance  unexpended. 

133.  The  other  theory  adopts  as  its  intermediary  a  supposed 
entity  "The  Business."    All  assets  are  regarded  as  "owing"  to 
The  Business  and  The  Business  is  regarded  as  owing  all  the 
"liabilities,"  in  which  are  included  the  proprietary  claims.    This 
is  a  favorite  theory  in  this  country,  and  it  has  this  merit  that  it 
recognizes  that  the  proprietor  or  proprietors  may  have  many 
other  investments  and  do  not  in  the  accounts  presented  reveal 
anything  more  than  their  worth  as  to  The  Business.    But  I  can- 
not see  that  it  justifies  the  inclusion  of  proprietorship  among  the 
liabilities.     Surely  The  Business  does  not  stand  in  the  same  re- 
lation to  its  proprietors  or  its  capitalists  as  to  its  "other"  lia- 
bilities.   It  would  seem  more  appropriate  to  say  that  it  is  "  owned 
by"  than  "owes"  the  proprietors. 

134.  On  the  preceding  page  are  shown  the  phases  which  the 
three  parts  of  the  balance  sheet  assume  from  the  different  stand- 
points. 


CHAPTER  IX 
OFFSETS  AND  ADJUNCTS 

SUPPLEMENTARY  ACCOUNTS  ;  THEIR  PURPOSE — OFFSETS  AGAINST  ASSETS 
— ADJUNCTS  TO  ASSETS — ADJUNCT  TO  PROPRIETORSHIP — OFFSET  TO 
PROPRIETORSHIP  SELDOM  REVEALED 

135.  It  is  sometimes  desirable  for  some  special  reason  to 
separate  the  account  of  an  asset,  of  a  liability,  or  of  a  proprietor 
into  two  accounts,  usually  in  order  to  present  two  different 
valuations.    We  shall  call  the  supplementary  account  an  offset 
or  an  adjunct  to  the  principal  account,  according  as  it  is  intended 
to  be  subtracted  from  or  added  to  the  principal  account. 

136.  As  an  instance  of  an  asset  take  a  set  of  machinery  which 
cost  a  year  ago  $130,000.    It  is  estimated  that  this  machinery 
will  be  worthless  in  a  few  years,  that  is,  that  in  those  years  its 
value  will  pass  from  $130,000  to  o.    It  is  also  estimated  that  the 
first  year  of  use  will  depreciate  the  machinery  to  the  extent  of 
20  per  cent,  or  $26,000.     If  it  is  desired  to  keep  a  record  of  the 
original  cost,  $130,000,  and  at  the  same  time  of  the  present 
worth,  $104,000,  it  may  be  done  by  using  two  accounts  on 
opposite  sides  of  the  ledger: 

Machinery  at  cost,  $130,000  Depreciation,  $26,000 

This  depreciation  is  not  a  liability,  although  it  is  frequently 
listed  among  the  liabilities,  but  an  offset  to  the  asset.  In  a  cor- 
rectly constructed  balance  sheet  it  would  not  appear  except 
indirectly  in  this  form : 


Machinery 

Cost $130,000 

Depreciation          26,000    $104,000 

58 


OFFSETS  AND  ADJUNCTS 


59 


137.  In  Chapter  VII  there  was  a  discussion  of  the  relation  be- 
tween a  piece  of  real  estate  and  the  mortgage  upon  it.  Two 
forms  of  stating  the  accounts  were  presented: 


(a)  Real  Estate $10,000 

(b)  Equity  in  Real  Estate: 

Value  $10,000,  Mort- 
gage $4,000 6,000 


Mortgage . 


$4,000 


In  case  (b)  the  $4,000  is  eliminated  as  being  merely  an  offset, 
while  in  (a)  it  is  treated  as  a  liability. 

138.  It  may  be  noted  here  that  it  is  not  quite  a  matter  of  in- 
difference which  of  these  forms  is  used,  but  that  the  facts  may  be 
different.     If   the  owner  bought  this  property  subject  to  the 
mortgage,  so  that  he  cannot  be  held  for  a  deficiency  judgment, 
then  it  is  quite  appropriate  to  treat  the  mortgage  as  an  offset  and 
the  equity  only  as  the  true  asset.    If,  however,  he  gave  his  note 
or  bond  for  the  $4,000  it  would  be  more  correct  to  keep  the 
mortgage  standing  by  itself  as  an  actual  liability. 

139.  While  offset  accounts  are  kept  in  their  current  state  for 
convenience,  it  is  proper  that  at  the  date  of  the  balance  sheet  they 
should  be  eliminated  by  subtraction  from  the  opposite  side. 
Adjuncts,  being  already  on  their  proper  side,  do  not  give  the 
same  trouble,  whether  they  are  left  in  the  main  column  or  added 
in  the  margin. 

140.  As  an  adjunct  to  an  asset,  take  the  case  of  a  bond  pur- 
chased at  a  premium,  the  par  value  being  $75,000  and  the 
premium  paid  being  $6,131.79.     It  is  desired  to  exhibit  both  the 
par  value  and  the  total  cost,  $81,131.79.    For  this  purpose  two 
accounts  may  be  carried  and  in  the  balance  sheet  they  may  both 
be  exhibited  or  their  sum : 

(a)  Bonds  at  par $75,000.00 

Premium 6,131.79 

(b)  Bonds  at  cost 81,131.79 


60  THE  PHILOSOPHY  OF  ACCOUNTS 

141.  As  an  offset  to  a  liability  we  may  take  the  case  of  a  note 
(bill  payable)  for  $6,666.67  which  has  just  been  discounted  at  3 
months  at  5  per  cent  per  annum.     It  is  desired  to  keep  an  open 
account  of  the  face  of  the  note  (the  sum  which  must  be  paid 
three  months  hence),  and  also  of  the  actual  proceeds.    This  is 
done  by  means  of  a  Discount  account,  an  offset  to  bills  payable. 
The  actual  proceeds  are  $6,583.34,  and  this  is  all  that  at  the 
beginning  of  the  three  months  is  owing;  as  the  three  months 
pass  the  liability  rises  till  it  reaches  $6,666.67  at  maturity.    The 
accounts  at  first  represent  the  condition  thus: 

Discount,  $83.33  Bills  Payable,  $6,666.67 

Many  bookkeepers  consider  the  discount  as  lost  or  "dis- 
served" at  once,  not  gradually.  Scientifically,  at  least  in  theory, 
it  should  be  assumed  that  the  liability  is  at  first  $6,583.34  and 
gradually  rises,  through  the  accretion  of  adverse  interest,  to 
$6,666.67,  which  latter  sum  is  composed  of  $6,583.34  borrowed 
+  $83. 33,  interest  at  5.0625  per  cent. 

142.  The  balance  sheet  in  Figure  24  gives  an  example  of  an 
adjunct  to  a  proprietary  account.    The  true  capital  balance  is 
$71,468.43,  but  it  is  divided  into  the  two  parts,  $60,000,  the  par 
value  of  the  shares,  and  $11,468.43,  the  surplus. 

143.  On  the  other  hand  let  us  suppose  that  the  nominal  capital 
had  been  fixed  at  $75,000,  which  would  really  have  been  nearer 
the  truth  than  $60,000.     The  $3,531.57  by  which  the  capitaliza- 
tion exceeds  the  true  value  would  then  be  an  offset  against  the 
$75,000  and  two  accounts  would  have  to  be  carried: 

Deficiency,  $3,531.57  Capital  Stock,  $75,000.00 

144.  This  is  theoretically  correct  but  in  practice  you  will 
seldom  see  such  a  frank  confession  of  impaired  capital.    Almost 
universally  the  assets  are  hoisted  to  meet  the  exigency,  or  the 
deficiency  is  represented  as  an  asset.    This  receives  some  euphe- 
mistic title,  such  as  "  Good- Will,"  "  Franchises,"  "  Patents."  This 


OFFSETS  AND  ADJUNCTS  6 1 

may  not  be  with  any  fraudulent  intent,  but  from  a  feeling  that 
the  latent  personal  assets,  spoken  of  in  Articles  84  and  101  as 
"non-ledger"  assets,  make  the  concern  worth  at  least  par  as  a 
revenue-producer.  There  is  a  natural  reluctance  to  admit  the 
fact  of  overcapitalization  or  "watering." 


CHAPTER  X 

INSOLVENCY 

CONVERSE  or  PROPRIETORSHIP — POSSIBILITY  OF  CONTINUING  IN  SPITE 
or  INSOLVENCY — FOUR  CASES 

145.  The  converse  or  negative  of  proprietorship  is  insolvency, 
When  the  assets  exceed  the  liabilities,  the  difference  is  pro- 
prietorship, or  net  wealth;  when  the  liabilities  exceed  the  assets 
the  difference  is  negative  wealth  or  insolvency.    The  equation  of 
the  balance  sheet  will  then  appear  as: 

Assets  +  Insolvency  =  Liabilities 

146.  Even  those  who  contend  that  proprietorship  is  among 
the  liabilities  would  scarcely  claim  that  insolvency  is  an  asset. 
In  actual  practice,  however,  it  is  seldom  admitted  that  there  is  a 
state  of  insolvency.     Precisely  as  in  the  case  of  unpaired  capital, 
treated  in  the  last  chapter  (Article  144),  some  alleged  asset  is 
inserted  to  swell  the  total  assets  to  a  state  of  at  least  solvency, 
from  the  same  motives  as  those  cited  in  that  article. 

147.  It  is  possible  that,  notwithstanding  the  balance  sheet  ex- 
hibits a  state  of  insolvency,  there  may  be  earnings  which  at  least 
equal  the  outlay,  thus  leaving  the  insolvency  or  deficit  unin- 
creased. 

It  is  even  possible  that  there  may  be  a  surplus  of  earnings 
which  tends  to  cut  down  the  deficit.  This  will  indicate  the 
existence  of  latent  (non-ledger)  assets  (Article  84)  overcoming 
the  deficit,  and  in  that  case  the  creditors  will  be  encouraged  to 
permit  the  concern  to  go  on,  that  course  being  advantageous  to 
them. 

148.  There   are  four   possible   cases   of   status   as   to   sol- 
vency and  the  power  to  improve  the  situation  (barring  exact 
equilibrium) : 

62 


INSOLVENCY  63 

1.  Solvent  and  gaining. 

2.  Solvent  but  losing. 

3.  Insolvent  but  gaining. 

4.  Insolvent  and  losing. 

149.  If  the  creditors  are  aware  of  the  facts,  their  attitudes 
under  these  four  suppositions  will  be  as  follows: 

1.  They  have  neither  the  right  nor  the  disposition  to  inter- 

fere with  the  management. 

2.  They  have  no  right  to  interfere  but  will  have  the  dis- 

position to  enforce  their  claims  in  advance  of  impending 
insolvency,  if  possible. 

3.  They  have  the  right  to  interfere  but  will  be  disposed  to 

refrain  from  doing  so. 

4.  They  have  both  the  right  and  the  disposition  to  interfere 

with  the  management  by  the  proprietor  and  will  en- 
deavor to  displace  him. 

150.  When  this  displacement  is  put  into  effect,  it  is  done 
through  the  agency  of  an  intermediary,  usually  a  representative 
of  the  courts,  whose  duty  it  is  to  administer  the  assets  and  as  far 
as  possible  to  discharge  the  liabilities.    His  balance  sheet  will 
not  be  a  proprietary  but  a  fiduciary  one,  as  will  be  explained 
later. 


CHAPTER  XI 
THE  PERIOD 

EQUAL  INTERVALS — MINOR  UNIT,  THE  DAY — MAJOR  UNIT,  THE  YEAR 
— INTERMEDIATE  UNIT,  THE  MONTH;  SOMETIMES  WEEK,  QUARTER, 
HALF-YEAR 

151.  The  balance  sheet  might  be  taken  at  any  moment  or  at 
any  irregular  interval  of  time;  but  in  order  that  the  events  during 
one  interval  may  be  profitably  compared  with  those  of  another, 
the  intervals  should  be  equal.     It  is  therefore  desirable  not  only 
to  make  the  periods  between  balances  equal,  but  to  make  them 
correspond  to  the  astronomical  divisions  of  time,  upon  which 
human  activities  so  much  depend.    Therefore  the  day  and  the 
year  are  the  minor  and  the  major  units  of  time  most  frequently 
employed  as  accounting  periods. 

152.  The  day  is  the  smallest  accounting  unit  of  time  recog- 
nized.    Commercial  transactions  on  the  same  day  are  regarded 
as  simultaneous,  and  obligations  are  generally  performable,  not 
at  a  certain  hour,  but  merely  on  a  certain  day,  at  an  optional  hour. 
When  the  hour  is  specified,  as  in  fire  insurance  and  rent,  it  does 
not  apply  to  the  financial  transaction  but  to  the  physical  fact, 
conflagration,  or  possession  which  determines  it. 

The  legal  day  is  from  midnight  to  midnight.    The  business 
day  is  from  the  beginning  of  business  hours  to  the  end. 

153.  From  any  part  of  the  business  hours  of  one  day  to  any 
part  of  the  business  hours  of  the  next  day  is  one  day,  not  two. 
Therefore  the  number  of  days  is  really  measured  by  the  number 
of  intervening  nights,  or  by  subtracting  the  numerical  designation 
of  the  initial  date  from  that  of  the  final  date. 

154.  As  the  date  from  which  reckoning  is  made  is  excluded, 
the  proper  way  of  designating  the  year  is  "from  the  3ist  of 

64 


THE  PERIOD  65 

December,  1906,  to  the  3 ist  of  December,  1907,"  rather  than 
"from  the  ist  of  January,  1907,  to  the  ist  of  January,  1908." 
This  latter  expression  would  really  mean  364  days  in  1907  and  i 
day  in  1908.  To  be  quite  definite  it  is  better  to  say  "  from  the  ist 
of  January  to  the  3 ist  of  December,  inclusive." 

155.  From  the  rule  of  excluding  the  day  from  which,  it  follows 
that  all  transactions  of  a  certain  date  are  to  be  considered  as 
occurring  at  the  close  of  business  on  that  day.    Balance  sheets 
are  sometimes  dated  as  of  the  day  at  the  beginning  of  which  the 
status  exists  and  sometimes  are  given  the  date  at  the  end  of  which 
it  exists,  the  same  balance  sheet  being  dated  indifferently  "De- 
cember 31, 1907,"  or  "January  i,  1908."    I  regard  the  former  as 
the  more  correct  for  the  reason  given  above  and  also  because  the 
balance  sheet  is  more  significant  as  the  result  of  the  work  of  1907 
than  as  the  inception  of  1908. 

156.  In  some  of  the  old  writers  a  balance  at  the  beginning  of 
the  first  day  of  a  month  was  designated  by  a  zero  date;  thus  the 
closing  balance  of  1906  would  appear  as  "December  31,  1906," 
while  the  same  balance  at  the  opening  of  1907  would  be  dated 
"January  o,  1907,"  a  quaint  but  logical  distinction. 

157.  A  daily  balance  sheet  is  not  unknown;  but  usually  it  is 
informally  made  up  without  disturbing  the  routine  of  the  ac- 
counts to  which  it  remains  external.    It  must  largely  depend 
upon  estimate  rather  than  realization;  or  else  the  accidental 
fluctuations  will  be  so  great  as  to  destroy  its  utility. 

158.  The  year  is  the  most  natural  and  usual  period  of  account- 
ancy.   The  calendar  year,  January  to  December  inclusive,  is  an 
easy  period  for  reference,  though  for  many  businesses  December 
31  is  not  a  natural  epoch  of  conclusion.    Quite  frequently  a  date 
is  selected  at  which  there  is  least  activity  in  the  business  itself  and 
most  leisure  for  the  labors  attendant  upon  the  balancing  process. 

159.  An  intermediate  unit,  such  as  the  quarter  or  the  month, 
is  often  chosen  for  the  purpose  of  summarizing  the  work  and 
comparing  it  with  the  same  unit  in  previous  years. 


66  THE  PHILOSOPHY  OP  ACCOUNTS 

160.  The  major  unit,  from  balance  sheet  to  balance  sheet,  is 
usually  the  year,  sometimes  the  half-year,  seldom  the  quarter- 
year.    The  intermediate  unit  is  almost  always  the  month,  oc- 
casionally the  week,  seldom  the  quarter;  a  special  period  of  28 
days  is  sometimes  used  so  as  to  embrace  even  weeks.    When  the 
half-year  or  the  quarter  is  the  balancing  period,  two  or  four  of 
them  are  easily  combined,  giving  the  yearly  history. 

161.  When  I  have  occasion  to  speak  of  these  periods,  it  will 
be  of  the  year  as  the  major  unit  of  time  or  balancing  period,  and 
of  the  month  as  the  intermediate  or  summarizing  period,  although 
in  fact  the  former  may  be  a  half-year  or  the  latter  a  week. 

162.  The  use  of  a  monthly  grouping  of  transactions  has  this 
special  advantage  for  keeping  a  general  ledger  and  subordinate 
ledgers  (Article  74) :  the  general  ledger  may  contain  only  monthly 
entries  in  aggregate,   while  the  subordinate  ledgers  contain 
separate  transactions  day  by  day.    The  general  ledger  will  be 
more  condensed  and  more  generalized,  with  saving  of  labor. 


CHAPTER  XII 

f> 
ECONOMIC  ACCOUNTS 

OBJECT  OF  THE  BUSINESS  STRUGGLE — ECONOMIC  ACCOUNTS  SUBORDINATE 
TO  PROPRIETORSHIP — THEIR  PURPOSE,  ANALYSIS — OUTSIDE  AND 
INSIDE  ACCOUNT — MUST  BE  LIMITED  TO  PERIOD  UNDER  CONSDDERA- 
TION — OUTLAY  DEPENDENT  ON  CONSUMPTION,  NOT  ON  THE  RECEIPT 
OF  SUPPLIES  NOR  ON  THE  PAYMENT  FOR  THEM — EXEMPLIFIED  AS  TO 
INTEREST 

163.  The  whole  purpose  of  the  business  struggle  is  increase 
of  wealth,  that  is  increase  of  proprietorship.    The  counterpart  of 
increased  proprietorship  is  either  increased  assets  or  their  equiva- 
lent, diminished  liabilities,  as  shown  in  Article  59  (5).    We  may 
in  discussion  ignore  the  case  of  diminished  liability  and  consider 
all  increase  of  proprietorship  as  manifested  in  increase  of  assets, 
which  increase  might  be  immediately  utilized  in  discharge  of 
liability. 

164.  While  increase  of  wealth  is  taking  place,  it  is  almost 
always  attended  by  a  partial  decrease,  a  parting  with  assets  in 
the  expectation  of  ultimately  recovering  assets  of  greater  value. 
These  decreases  are  offsets  to  the  increase,  but  for  analytical 
purposes  are  usually  kept,  in  the  first  instance,  separate. 

165.  The  all-important  purpose  of  the  proprietary  accounts  is 
to  measure  the  success  or  failure  in  increasing  wealth,  and  to 
analyze  that  success  or  failure  so  as  to  ascertain  its  causes,  as  a 
guide  for  future  conduct. 

166.  Increases  and  decreases  of  wealth,  so  far  as  they  arise 
from  business  conduct,  are,  therefore,  not  recorded  immediately 
on  the  accounts  of  proprietorship  but  in  subordinate  accounts. 
Each  of  these  subordinate  accounts  represents  a  class  of  events 
in  the  business  conduct  dependent  on  a  common  cause,  as  Mer- 

67 


68  THE  PHILOSOPHY  OF  ACCOUNTS 

chandise  Profit,  Interest,  Discount,  Rent,  Insurance,  Salaries, 
Expense,  Freight,  Taxes.  Whenever  any  increase  or  decrease  of 
wealth  is  realized  or  recognized  it  is  recorded,  according  to  its 
nature,  in  one  of  these  subordinate  accounts,  which  we  shall  call, 
as  a  whole,  the  "economic  accounts." 

167.  Mere  accessions  of  capital  not  earned  but  contributed  do 
not  belong  in  the  economic  accounts.    An  example  of  this  is  given 
in  Article  91,  where  Smith  brings  in  additional  capital  but  no 
economic  change  takes  place. 

1 68.  The  economic  accounts  should  run  for  a  definite  time.    It 
must  be  kept  in  mind  that  they  are  tributary  to  the  proprietary 
accounts  and  that  they  withhold  certain  records  for  the  purpose 
of  an  analytical  summary.    No  comparison  of  one  of  these  sum- 
maries with  another  can  be  useful  unless  they  cover  an  equal 
time.    The  rate  of  progress  must  be  ascertained  by  obtaining  a 
common  denominator  in  tune.   It  is  therefore  the  best  accounting 
practice  to  keep  economic  accounts  open  for  the  year  (or  balanc- 
ing period)  and  then,  with  the  greatest  nicety,  carry  the  net  re- 
sult into  the  main  proprietary  account,  which  in  the  meantime 
has  stood  still  awaiting  the  returns  of  its  subordinates. 

169.  Thus,  by  an  ingenious  and  somewhat  artificial  system  of 
economic  accounts,  the  highest  possibilities  of  accountancy  are 
attained.    Without  the  analysis  here  described,  it  would  hardly 
be  worth  while  to  maintain  any  proprietary  accounts,  at  least 
for  a  sole  proprietor.    Omitting  the  proprietary  and  economic 
accounts   would    leave   what   is    generally  known   as   "single 
entry." 

170.  The  accounts  of  assets  and  liabilities,  as  we  have  already 
said,  are  the  specific  accounts.    They  might  also  be  called  the 
"exterior"  accounts,  as  they  alone  affect  persons  outside  of 
the  business,  while  the  proprietary  and  economic  accounts  are  the 
"interior"  ones,  kept  for  the  instruction  of  those  inside.    The 
economic  accounts  may  therefore  be  kept  with  a  freer  hand  than 
the  specific;  their  subdivision,  the  plan  of  their  arrangement,  the 


ECONOMIC  ACCOUNTS  69 

decision  as  to  the  treatment  of  doubtful  (or  "border-line")  cases 
are  entirely  at  the  option  of  the  proprietors. 

171-  Where  it  is  a  question  of  more  or  less  minute  subdivision, 
the  more  minute  is  usually  the  safer,  because  it  is  easier  to  remedy 
overminuteness  by  combination  than  to  reanalyze  what  is  found 
not  minute  enough.  It  is  easier  to  mix  wine  and  water  than  to 
separate  them. 

172.  The  ordinary  forms  of  ledger  account  may  be  abandoned 
altogether  for  the  economic  accounts  and  some  form  of  tabulation 
substituted,  which  will  often  exhibit  the  results  far  more  effec- 
tively.   The  metaphoric  conceptions  of  debtor  and  creditor  may 
be  totally  discarded  here  where  they  have  less  pertinency  than  in 
any  other  class  of  accounts.    These  accounts  have  nothing  what- 
ever to  do  with  indebtedness,  but  represent  on  their  respective 
sides: 

Loss  PROFIT 

EXPENSE  GAIN 

CHARGES  REVENUE 

OUTLAY  INCOME 

EARNINGS 

All  these  synonyms  are  used  in  various  connections  with 
slightly  varying  shades  of  meaning,  but  their  general  purport  is: 

DECREASE  OF  WEALTH  INCREASE  OF  WEALTH 

for  services  received  for  services  given 

173.  Unless  care  is  taken  to  include  in  the  economic  entries 
of  a  period  all  that  properly  belongs  in  it  and  to  exclude  all  that 
pertains  to  any  other  period  before  or  after,  we  may  greatly 
distort  the  presentation  of  facts  so  as  to  render  it  valueless;  the 
period  which  has  been  adverse  may  appear  prosperous  at  the 
expense  of  one  which  is  actually  more  successful.    The  question 
must  always  be  asked :  Is  there  any  residual  asset  or  liability  at 
the  beginning  or  at  the  end  of  the  period  which  has  not  been  taken 
into  account? 


70  THE  PHILOSOPHY  OF  ACCOUNTS 

174.  Many  consider  that  there  is  no  income  until  received  in 
cash  and  that  there  is  no  outlay  until  paid  in  cash.    Suppose  one 
of  the  large  expenses  of  a  business  is  the  cost  of  coal.    Coal  is 
ordered  and  put  into  the  bins  hi  January,  say  200  tons,  and  paid 
for  in  February,  at  $5  per  ton.    It  is  used  up  as  follows:  in 
January,  30  tons;  in  February,  26  tons;  in  March,  31  tons. 

175.  Those  who  treat  everything  as  being  outlay  at  the  time 
of  cash  payment  would  make  no  entry  in  January;  in  February 
the  entry: 

Coal  [expense]/Cash $1,000 

The  economic  summaries  for  these  three  months  would  then 
indicate  the  cost  of  coal  as  follows: 

For  January o 

February $1,000 

March o 

January  and  March  would  be  relieved  from  all  expense  for  coal 
although  the  coal  was  used  right  along,  and  those  months  would 
appear  as  very  profitable  but  February  as  most  disastrous. 

176.  Another  bookkeeper  might  think  proper  to  credit  the 
dealer  as  soon  as  the  coal  is  received  and  charge  him  when  paid 
for: 

Jan.  Coal  [expense]/Coal  merchant $1,000 

Feb.  Coal  merchant/Cash 1,000 

This  is  more  correct  than  the  cash  statement,  for  it  recog- 
nizes the  purchase  at  its  proper  date.  But  there  is  again  a  false 
distribution  of  the  cost.  The  entire  cost  of  the  coal  is  merely 
shifted  to  January,  and  that  month  stands  all  the  burden,  while 
February  and  March  go  free. 

177.  The  error  is  in  considering  the  coal  as  instantly  con- 
sumed when  paid  for  or  when  received.    The  true  cost  in  such  a 
case  is  the  value  consumed,  the  residual  coal  being  an  asset. 


ECONOMIC  ACCOUNTS 


178.  When  the  coal  was  purchased,  it  was  all  an  asset.    Coal, 
as  an  expense,  was  the  quantity  burned: 

Jan.  Coal  [asset]/Coal  dealer $1,000 

"  Coal  [expense]/ Coal  [asset] 150 

Feb.  Coal  dealer/Cash 1,000 

"  Coal  [expense]/ Coal  [asset] 130 

Mar.  Coal  [expense]/ Coal  [asset] 155 

FIGURE  28 
COAL  [ASSET] 


Jan.    Purchased  200  tons ...     $1,000 


$1,000 


Jan.  Consumed    30  tons . 

Feb.  "            26  tons. 

Mar.  "            31  tons. 

"  Balance      113  tons. 


$150 
130 
155 
565 

$1,000 


COAL  [EXPENSE] 


Jan.    Consumed $15° 

Feb.  "         130 

Mar.  "  155 


179.  If  no  record  of  the  coal  consumed  has  been  kept,  we 
should  have  to  resort  to  taking  an  inventory  of  the  amount  on 
hand  and  thence  inferring  the  consumption. 


FIGURE  29 
COAL 


Jan.   Purchased  200  tons.  . .     $1,000 


Apr.   i  Balance. 


$1,000 

$565 


Mar.  31  Balance  as  per 
Inventory  113 
tons $565 

Jan.-Mar.  Consumption 435 

$1,000 


THE  PHILOSOPHY  OF  ACCOUNTS 


180.  This  is  an  account  of  coal  as  an  asset  and  also  of  the 
consumption  of  coal  as  an  economic  fact,  the  latter  being  inferred 
from  the  former.    The  first  presentation  in  Article  178  furnished 
a  check  upon  consumption  of  coal;  the  quantities  issued  from  the 
storehouse  being  known,  the  balance  on  hand  should  be  113  tons 
and  any  deviation  from  that  quantity  indicates  error  or  defalca- 
tion.    In  this  latter  presentation  there  is  no  check  on  the 
inventory. 

181.  If  the  coal  had  been  purchased  in  small  quantities  as 
needed,  say,  about  10  tons  a  week,  the  purchases  would  have 
been  so  nearly  in  accord  with  the  consumption  that  no  great  error 
would  be  made  in  considering  the  coal  as  an  expense  as  soon  as 
bought. 

FIGURE  30 
COAL  [EXPENSE] 


Jan. 


Feb. 


Mar. 


i     10  tons. 
8     10 
15     10 

22       IO 

29     10 

6 

6 


5 

12 


19 
26 

5 

12 


10 

19  10 
26  10 


50 
50 
50 
50 
50 
30 
30 
30 
30 
40 
50 
50 

J>o 
560 


In  this  account,  unadjusted,  there  is  an  error  of  $125,  or 
rather  a  neglected  asset  of  that  value.  In  modern  accountancy, 
no  such  errors  even  if  minute  are  allowed  to  stand  over  into  the 
next  period,  but  an  adjustment  is  made  rectifying  both  the  con- 
sumption and  the  residue. 


ECONOMIC  ACCOUNTS  73 

182.  The  only  absolutely  correct  rule  is  to  base  the  outlay 
account,  not  on  the  receipt  of  the  supplies  nor  on  the  payment  for 
them,  but  on  their  consumption,  and  it  should  be  apportioned  as 
to  time  accordingly,  either  by  a  regular  account  of  consumption, 
checked  by  an  inventory,  or  by  inference  from  the  inventory. 

183.  It  may  be  asked  whether  the  same  rule  applies  to  sup- 
plies having  almost  no  salable  value,  such  as  business  stationery 
designed  especially  for  a  certain  particular  concern.    Perhaps 
there  has  been  considerable  expenditure  for  engraving,  printing, 
ruling,  binding,  etc.,  and  yet  this  would  be  a  dead  loss  for  purposes 
of  sale,  the  value  being  actually  below  that  of  the  blank  paper. 
The  residual  asset,  it  might  therefore  be  argued,  is  practically 
nothing.    But  this  is  not  quite  correct;  for  selling  purposes  on 
liquidation,  its  value  would  be  nothing,  but  to  go  on  with,  it  has  its 
full  proportionate  value.    If  a  year's  supply  was  bought  and 
enough  remains  in  good  condition  to  last  a  half-year  longer,  then 
half  the  total  cost  has  been  consumed  and  half  remains  as  an 
asset.     Its  value  as  an  asset  consists  in  relieving  us  from  the 
necessity  of  expending  anything  further  for  the  same  purpose  for 
months  to  come.    For  this  purpose  it  is  as  good  as  the  cash. 

184.  This  question  of  two  valuations,  one  for  liquidation,  the 
other  for  a  going  business,  frequently  arises.     I  am  of  the  opinion 
that  in  a  going  business  the  latter  is  the  balance  to  be  carried, 
because  only  in  that  way  can  the  true  economic  outlay  or  income 
be  ascertained.    This  is  not  the  same  case  as  that  of  the  deprecia- 
tion of  plant,  which  is  a  normal  charge  and  should  be  provided 
for  out  of  income;  it  is  the  case  of  current  supplies  being  made 
"second-hand"  by  the  process  which  adapts  them  to  their 
purpose. 

185.  Rent  paid  in  advance  is  a  valid  asset,  whether  it  would 
have  any  selling  value  on  winding-up  or  not.    It  is  the  right  to 
occupy  the  premises  for  a  definite  time,  without  further  payment. 
It  is  the  remainder  of  a  contract  of  which  the  lessee  has  performed 
all  and  the  lessor  only  a  part. 


74 


THE  PHILOSOPHY  OF  ACCOUNTS 


186.  It  frequently  happens  that  the  actual  cash  receipt  or 
payment  resulting  from  any  economic  source  exactly  coincides  as 
to  time  with  the  consumption  or  accretion  to  which  it  corre- 
sponds.   This  coincidence  must  not  make  us  lose  sight  of  the 
fact  that  it  is  really  the  consumption  or  accretion  of  a  right  which 
we  need  to  record  in  economic  statements,  not  the  settlement  of 
the  claim  in  cash. 

187.  This  is  particularly  noticeable  in  those  economic  depart- 
ments where  the  value  is  measured  hi  time  units  (like  interest 
and  rent)  rather  than  in  volume  units  (like  coal  or  gas). 

188.  Interest  is  usually  payable  in  cash,  semiannually.    It  is 
earned,  however,  continuously,  the  day  being  the  smallest  unit 
recognized.    We  will  take  the  case  of  a  mortgage  loan  for  $18,000 
at  5  per  cent,  due  3  years  from  May  i,  interest  payable  semi- 
annually on  the  first  of  May  and  of  November.  The  balancing 
period  is  also  semiannual,  January  i  to  June  30,  inclusive,  and 
July  i  to  December  31,  inclusive.    This  is  the  only  asset  on  Jan- 
uary i,  the  loan  being  made  as  of  that  date.    On  May  i,  4 
months'  interest  having  accrued,  $300  are  collected  on  or  soon 
after  that  day,  and  this  is  all  during  the  half-year.    The  book- 
keeper who  deals  only  with  cash  would  make  the  economic 
entry : 

Cash/Interest $300 

A  balance  sheet  of  June  30  would  then  show  this  result: 


Mortgage $18,000 

Cash 300 

$18,300 


Proprietor $18,300 


$18,300 


189.  This  result  is  incorrect;  it  shows  that  the  proprietor  on 
a  5  per  cent  investment  has  received  or  benefited  only  at  the  rate 
of  3  1/3  per  cent. 


ECONOMIC  ACCOUNTS 


75 


190.  In  fact,  the  mortgage  loan  is  not  now  an  asset  of  $18,000 
but  of  $18,150.    The  mortgage  paper  not  only  secures  the  pay- 
ment of  $18,000  a  few  years  from  now  but  it  secures  just  as  firmly 
the  right  to  interest  at  the  rate  of  5  per  cent  per  annum.    The 
$150  is  just  as  valid  an  asset  as  the  Si 8,000.      The  objection  will 
be  made  that  the  $i  50  is  not  due  and  may  never  be  collected;  the 
reply  is  that  the  $18,000  is  not  due  either  and  we  might  as  well 
strike  it  out  of  our  assets. 

191.  Instead  of  the  interest  entry  given  above  the  following 
would  have  been  correct: 

Mortgage/Interest  [earnings] $450 

Cash/Mortgage 300 

FIGURE  31 
BALANCE  SHEET 


Mortgage $18,150 

Cash 300 

$18,450 


Proprietor $18,450 


$18,450 


192.  This  represents  the  facts  correctly,  but  in  practice  it  is 
preferable  to  keep  the  Mortgage  account  at  par  or  principal,  and 
make  an  adjunct  account  of  the  interest  which  has  been  earned. 
"Interest  Receivable"  will  be  a  distinctive  title  for  this,  which  is 
really  a  portion  of  the  mortgage  debt,  and  the  entries  will  be: 

Interest  Receivable/Interest  [earnings] $45° 

Cash/Interest  Receivable 300 

FIGURE  32 
BALANCE  SHEET 


Mortgage  [principal] $18,000 

Interest  Receivable 150 

Cash 300 


Proprietor $18,450 


$18,450 


76  THE  PHILOSOPHY  OF  ACCOUNTS 

Interest  Receivable  may  be  subdivided  into  Interest  Accrued  and 
Interest  Due,  as  will  be  explained  under  assets,  but  that  distinc- 
tion is  not  now  in  question. 

193.  In  the  following  half-year  the  earnings  will  be  $450  and 
the  cash  receipts  $450,  but  this  is  merely  coincidence;  the  $450 
cash  is  not  collection  of  the  $450  earned.    It  is  the  collection  of 
$150  for  May  and  June,  and  of  a  part,  $300,  of  the  July-December 
interest. 

194.  On  the  cash  plan,  the  last  half-year,  in  which  the  mort- 
gage falls  due,  would  show  an  apparent  earning  of  $450  instead 
of  $300;  an  error  equal  and  opposite  to  that  of  the  first  half- 
year. 

195.  This  question  of  Outlay  and  Income,  as  opposed  to  Re- 
ceipts and  Payments,  is  one  which  frequently  arises  in  practice. 
It  has  often  been  discussed  as  to  municipal  accounting.    Those 
who  contend  that  there  is  no  income  until  it  is  collected  in  cash 
seem  to  forget  that  this  reasoning  would  prevent  us  from  making 
any  record  of  sales  except  cash  sales;  also  that  one  of  .the  objects 
of  public  accountancy  is  to  test  what  is  received  by  what  ought 
to  be  received. 

196.  The  cash  receipt  or  payment  is  not  the  cause  of  the 
increase  or  decrease  of  proprietorship,  but  the  effect,  although  in 
point  of  time  it  may  precede.    The  cause  of  the  economic  event 
is  service  given  or  received  and  it  may  just  as  well  be  embodied  in 
any  other  asset,  usually  in  a  right,  as  in  cash.      It  is  therefore 
short-sighted  to  look  upon  the  cash  transaction  as  originating 
the  entry. 

197.  If  a  cash  statement  is  the  only  record  extant  of  the 
transactions  of  a  period,  it  may  be,  and  should  be,  converted 
into  an  Outlay  and  Income  account  by  adjustment.    This  ac- 
count, as  derived  from  cash,  is  mixed,  partly  specific  and  partly 
economic.     The  adjustment  consists  in  inserting  such  balances  as 
are  known  to  be  specific,  both  at  the  beginning  and  at  the  end  of 
the  account. 


ECONOMIC  ACCOUNTS 


77 


198.  For  example,  the  Interest  account  based  on  the  transac- 
tions in  Article  188,  would  be  a  mixed  account,  partly  represent- 
ing claims  against  persons  for  interest  and  partly  representing  the 
economic  result  or  increase  of  proprietorship  through  interest. 
Only  by  adjustment  can  we  separate  these. 

FIGURE  33 
INTEREST 


Jan.-June  Collected $300 

July-Dec.  Collected 450 


As  adjusted  and  ready  for  transfer  to  the  Proprietorship  account: 

FIGURE  34 
INTEREST 


June  30     Net  Income . 


July    o     Accrued $150 

Dec.  31     Net  Income 450 


Jan.-June  Collected 

June  30     Accrued 150 

$450 


July-Dec.  Collected $450 

Dec.   31     Accrued 750 


Jan.    o    Accrued $150 


199.  The  net  income  here  appears,  as  it  should,  equal  in  the 
two  periods.  All  that  is  printed  in  italics  is  adjustment.    Having 
inserted  at  the  beginning  and  end  the  ascertained  balances  the 
resultant  is  the  economic  result  to  which  the  proprietor  is  en- 
titled.   By  a  coincidence,  the  result  in  cash  and  the  economic 
result  in  the  second  period  appear  the  same;  but,  as  already 
explained,  they  are  equivalent,  not  co-extensive. 

200.  An  economic  account  is,  normally,  one-sided.    That  is, 
it  should  represent  either  outlay  or  income,  not  both.    Mixed  ac- 
counts, such  as  an  Interest  account  which  represents  on  the  one 


78  THE  PHILOSOPHY  OF  ACCOUNTS 

side  Interest  Cost  and  on  the  other  side  Interest  Revenue,  are 
not  generally  to  be  commended.  The  two  sets  of  events  had 
better  be  kept  distinct  unless  they  are  in  fact  correlated.  The 
"off"  side  of  an  economic  account  is  better  reserved  for  offsets 
or  corrections,  of  the  normal  side.  A  mixed  account  of  this  kind 
may  sometimes  require  in  its  adjustment  a  double  balance,  an 
asset  being  brought  down  to  the  debit  and  a  liability  to  the 
credit.* 

The  economic  accounts  should  comprise  the  regular  outlays 
and  incomes  forming  part  of  the  economic  scheme,  and  judgment 
must  be  used  in  laying  out  these  accounts.  For  example,  loss 
by  bad  debts  is  in  some  businesses  so  improbable  that  such  a  catas- 
trophe is  made  the  subject  of  a  special  entry.  On  the  other 
hand,  in  other  kinds  of  business  a  current  economic  account  is 
required  for  "Bad  Debts"  as  a  normal  incident  of  the  business, 
under  that  or  some  other  name.  There  are  then  three  ways  of 
treating  worthless  accounts:  (i)  by  transferring  them  bodily  to 
this  account;  (2)  by  merely  marking  them  with  some  symbol, 
crediting  an  offset  account  to  the  same  amount;  (3)  by  crediting 
a  reserve  based  on  the  percentage  of  experience  as  a  general  offset. 

201.  It  would  be  desirable  if  the  titles  of  accounts  could 
indicate  by  their  form  whether  they  were  primarily  intended  to 
be  specific  or  economic.  As  any  economic  account  may  give  a 
specific  residue  and  almost  any  specific  account  may  yield  an 
economic  resultant,  it  is  not  usual  to  make  such  distinction  in 
titles.  But  it  is  sometimes  very  useful  to  do  so,  as,  for  example, 
in  the  interest  accounts.  Interest  Receivable,  Interest  Due,  In- 
terest Accrued,  Interest  Payable  are  assets  or  liabilities,  from 
which  the  economic  accounts  Interest  Cost  and  Interest  Revenue 
should  be  clearly  differentiated. 


*  For  a  special  study  of  the  Merchandise  account,  which  as  formerly  kept  was  a  mixed 
account,  see  Appendix,  Monograph  B. 


CHAPTER  XIII 
THE  ECONOMIC  SUMMARY 

ACCOUNT  INTERMEDIATE  TO  THE  ECONOMIC  AND  THE  PROPRIETARY  AC- 
COUNTS— VARIOUS  NAMES  FOR  THIS  ACCOUNT — EXAMPLES  OF  PROFIT 
AND  Loss,  TRADING,  AND  DISTRIBUTION  ACCOUNTS — STATEMENT  IN 
UNTECHNICAL  FORM — TABULAR  FORM 

202.  At  the  close  of  the  period,  the  economic  accounts,  re- 
duced to  their  simplest  terms,  must  be  transferred  into  the  pro- 
prietary accounts,  as  if  they  were  receptacles  for  measuring  the 
effects  of  various  causes  and  were  poured  at  the  appointed  time 
into  the  great  reservoir.    But  as  there  are  among  them  both 
positives  and  negatives  it  is  found  convenient  to  have  an  inter- 
mediate account,  a  summary  of  all  their  results.    From  this  ac- 
count of  the  second  degree  a  resultant  is  obtained  for  distribution 
to  the  proprietary  interests;  and  sometimes  even  this  is  not  done 
directly  but  through  an  account  of  the  third  degree  raised  solely 
for  the  purpose  of  distribution.    The  freedom  (already  alluded  to) 
of  the  interior  accounts  as  to  form,  permits  any  device  to  be  em- 
ployed which  will  tend  to  a  clearer  view  of  the  economic  history 
of  the  period. 

203.  The  account  of  the  second  degree,  which  I  have  called 
the  "economic  summary,"  is  known  hi  practice  by  various 
names:  Profit  and  Loss,  Loss  and  Gain,  Trading,  Outlay  and 
Income,  Revenue. 

"Profit  and  Loss"  is  the  most  usual  of  these  names.  Two  ob- 
jections are  made  to  it.  The  first  is  as  to  the  order  of  the  two 
nouns.  Writing  as  we  do  from  left  to  right,  "profit"  is  brought 
on  the  left,  whereas  the  right  side  is  the  one  on  which  all  profit  is 
entered.  It  is  claimed  that  instead  of  : 

79 


8o 


THE  PHILOSOPHY  OF  ACCOUNTS 
PROFIT  AND  LOSS 


we  should  write: 
LOSS 


AND 


PROFIT 


or 


LOSS 


AND 


GAIN 


This  I  regard  as  a  somewhat  fanciful  objection,  the  order  of  the 
words  being  suggested  by  our  preference  and  expectation  rather 
than  by  any  intention  of  heading  each  side  with  a  distinctive 
title. 

204.  The  second  objection  is  that  the  debits  of  such  an  ac- 
count are  not  "losses"  but  are  a  necessary  investment  which  is 
expected  to  be  more  than  returned ;  they  are  values  laid  out  with 
the  expectation  that  they  will  later  come  in.    From  this  point  of 
view  "Outlay  and  Income"  would  seem  to  be  an  appropriate 
title,  agreeing  with  the  location  of  the  two  sides  of  the  account, 
and  also  indicating  that  outlay  is  always  incurred  before  income 
is  acquired. 

205.  We  may  consider  the  title  "Profit  and  Loss  account," 
however,  as  referring,  not  to  the  items  composing  it,  but  to  the 
final  outcome,  which  is  either  Profit  or  Loss.    In  this  sense  the 
time-honored  title  is  entirely  justified. 


THE  ECONOMIC  SUMMARY  8 1 

206.  To  present  the  affairs  of  a  business  concern  at  the  close 
of  a  year  in  intelligible  shape  it  is  necessary  to  have  these 
documents: 

A  balance  sheet  at  the  end  of  the  period,  showing  the  then 

condition. 
A  Profit  and  Loss  account  for  the  period,  showing  how  the 

condition  was  attained. 

There  may  also  be  presented : 

A  balance  sheet  at  the  beginning  of  the  period,  which  may 
be  incorporated  with  the  final  balance  sheet  in  side 
columns. 

Various  schedules  giving  details  of  the  contents  of  the  fore- 
going documents. 

207.  For  the  sake  of  illustration  we  will  take  the  business  of 
the  Jones  Mercantile  Company,  whose  balance  sheet,  say,  on 
December  31,  1906,  appears  in  Article  94.    We  desire  to  bring 
the  history  down  to  December  31,  1907,  and  to  present  a  balance 
sheet  and  Profit  and  Loss  account  under  that  date. 

The  following  are  the  economic  accounts  which  it  has  been 
thought  advisable  to  keep : 

Sales.  On  the  credit  side  of  this  account  are  entered  the 
amounts  of  merchandise  sold,  at  selling  price.  Ordinarily  these 
would  be  entered  in  the  Sales  account  in  monthly  totals  only,  the 
separate  bills  being  recorded  in  sales  books.  On  the  debit  side  of 
the  account  is  entered  the  cost  of  the  sold  goods,  either  in  monthly 
or  in  yearly  aggregate.  The  difference  is  the  merchandise  profit; 
it  is  debited  to  the  Sales  account  as  a  result  and  credited  to  the 
Profit  and  Loss  account.  This  result  is  $15,520.66.  The  com- 
pany has  given  to  its  customers  the  services  of  bringing  its  stock 
of  goods  near  their  homes,  of  arranging  them  for  selection,  of 
hiring  salesmen  to  exhibit  them,  of  making  public  their  good 
qualities  and  of  transporting  them  to  the  homes  of  purchasers. 

6 


82  THE  PHILOSOPHY  OF  ACCOUNTS 

The  payment  for  these  services  consists  in  the  merchandise  profit, 
$15,520.66. 

Some  of  the  services  included  in  this  profit  must  be  paid  for, 
reducing  to  that  extent  the  profit  of  the  company. 

Salaries.  Direct  payment  for  services  of  those  employed  in 
the  business.  A  debit  entry  to  Profit  and  Loss  of  $4,000. 

Delivery.  Payment  to  express  companies  and  to  messengers 
for  delivering  goods.  A  debit  of  $987.56. 

Freight.  This  has  been  already  comprised  in  the  cost  of  the 
goods,  the  principle  being  that  we  reckon  as  cost  all  expenditures 
up  to  the  moment  the  goods  are  on  our  shelves;  thereafter  as 
expense  of  selling. 

Insurance.  The  company  paid  premiums  for  insurance 
against  fire,  both  on  its  goods  and  on  its  store,  amounting  to 
$169.50. 

Interest  Cost.  Interest  has  been  or  must  be  paid  on  the  mort- 
gage and  on  the  bills  discounted,  amounting  to  $387.50. 

Taxes.  The  annual  taxes  assessed  against  the  real  estate, 
$151.42. 

Repairs.    A  similar  charge  against  the  real  estate,  $232.19. 

Fuel.  On  this  account  there  may  be  a  residue  as  illustrated 
in  Article  178.  The  amount  actually  consumed  is  $365. 

Light.  This,  being  metered,  leaves  no  residue  and  the  entire 
amount,  $279.50,  is  debited  to  Profit  and  Loss. 

Supplies.  On  this  account  again  there  is  no  residue,  as  the 
company  takes  all  its  supplies  from  its  own  stock,  charging 
them  at  cost  and  only  as  fast  as  required.  Debit  $463.84. 

208.  In  addition  to  the  profit  on  merchandise,  there  are  some 
other  sources  of  income  which  must  appear  to  the  credit  of  the 
Profit  and  Loss. 

Interest  Revenue.  At  the  middle  of  the  year  $5,000  were  in- 
vested at  6  per  cent,  producing  $150  interest.  It  may  be  asked 
why  this  and  the  Interest  Cost  account  should  not  be  combined  in 
a  single  Interest  account,  to  be  debited  with  $387.50  and  credited 


THE  ECONOMIC  SUMMARY  83 

with  $150.  This  might  be  done  and  often  is  done,  but  in  reality 
there  is  no  connection  between  the  two  kinds  of  interest,  and  their 
difference,  $237.50,  has  no  distinct  meaning. 

Rent  Revenue.  The  company  lets  a  part  of  its  building  for 
$240  per  annum. 

209.  Transferring  the  result  of  each  of  these  accounts  to  a 
Profit  and  Loss  account,  we  have  as  net  earnings  or  increase  of 
proprietorship,  $8,374.15,  the  distribution  of  which  is  shown  in 
the  second  part. 


FIGURE  35 
PROFIT  AND  LOSS 


Outlay 
Salaries  

$4,000.00 

Income 
Profit  on  Sales  $15,520.66 

Delivery                         .  . 

087.  56 

Interest  150.00 

Insurance           

169.50 

Rent  240.00 

Interest  

387.50 

Taxes  

151.42 

Repairs         

232.19 

Fuel  

365.00 

Light                 

279.50 

Supplies  

463.84 

Net  Profit  

$7,036.51 
8,874.15 

$15,910.66 

$15,910.66 

Dividend,  $10  per  share  . 
Carried  to  Surplus  

$6,000.00 
2,874.15 

Net     Profit,     brought 
down  $8,874.15 

$8,874.15 

$8,874-15 

SURPLUS 


1907 
Jan.     o 
Dec.  31 


Balance $11,468.43 

Profit 2,874.15 

$14,342.58 


THE  PHILOSOPHY  OF  ACCOUNTS 


This  subdivision  of  the  economic  summary  into  several  stages 
is  a  modern  and  very  useful  invention  of  the  British  accountants. 
210.  The  resulting  balance  sheet  might  be  as  follows: 

FIGURE  36 

BALANCE  SHEET 
At  the  beginning  of  business,  January  i,  1908 


Cash $7,643.59 

Bonds 5,000.00 

Merchandise 44,262.83 

Bills  Receivable 5,250.00 

Personal  Debtors 24,826.99 

Real  Estate 10,000.00 

Fuel 55.00 

Accrued  Interest 50.00 

$97,088.41 


Personal  Creditors $5,745-83 

Bills  Payable 7,000.00 

Mortgage  Payable 4,000.00 

Dividends  Payable 6,000.00 

Total  Liabilities. .  . .  $22,745.83 

Capital  Stock 60,000.00 

Surplus 14,342.58 


$97,088.41 


In  the  above  balance  sheet  the  more  natural  order  has  been  fol- 
lowed in  placing  the  proprietary  accounts  last,  which  also  admits 
of  the  insertion  of  the  total  of  liabilities. 

211.  The  Profit  and  Loss  account  submitted  in  Article  209 
gives  the  correct  result,  but  may  be  criticized  in  several  respects. 
It  does  not  show  the  profit  made  in  the  process  of  buying  and 
selling  as  distinguished  from  the  interest  on  securities  which  has 
nothing  to  do  with  merchandising.     It  also  mingles  the  cost  of 
maintaining  the  real  estate  with  the  shop  expenses. 

It  will  be  a  useful  lesson  in  the  construction  of  economic 
summaries  if  we  reform  this  one  so  as  to  obviate  the  above 
objections. 

212.  We  shall  first  open  a  Trading  account,  excluding  from 
it  all  items  which  do  not  belong  to  the  business  of  merchandising. 

213.  As  to  the  real  estate  entries,  upon  consideration  we  see 
that  the  ownership  of  the  property  saves  us  the  payment  of  rent. 
The  insurance  (so  far  as  it  relates  to  the  building),  the  taxes,  the 
repairs,  the  interest  on  mortgage,  all  these  are  a  substitute  for 


THE  ECONOMIC  SUMMARY  85 

rent.  Furthermore,  there  are  $6,000  equity,  on  which,  if  we 
borrowed  the  money,  we  should  have  to  pay  6  per  cent  interest. 
We  open  an  account  with  Real  Estate  Expense  and  transfer  to 
it  all  the  above  outlays  by  the  following  entries: 

Real  Estate  Expense/Insurance  (on  real  estate) $  70.00 

Real  Estate  Expense/Interest  Cost  (on  mortgage) 300.00 

Real  Estate  Expense/Taxes 151.42 

Real  Estate  Expense/ Repairs 232.19 

Real  Estate  Expense/Interest  Revenue 360.00 

On  the  other  hand,  we  have  not  used  all  the  premises  ourselves, 
but  have  let  a  part  for  $240,  which  reduces  the  rent  cost  to  the 
company  by  that  amount: 

Rent  Revenue/Real  Estate  Expense 

When  all  these  entries  are  posted,  the  Real  Estate  Expense 
account  will  appear  as  follows: 

FIGURE  37 
REAL  ESTATE  EXPENSE 


Insurance  

$70.00 

Rent  

$240.00 

Interest  on  Mortgage  .... 
Taxes.  .  .  . 

300.00 

I  ^1.4.2 

Carried  to  Profit  and  Loss  . 

873-61 

Repairs  

212.  IQ 

Interest   on    Equity    [es- 
timated]   

360  oo 

$1,113.61 

$1,113.61 

The  expense  as  to  real  estate,  which  takes  the  place  of  rent,  is 
thus  reduced  to  the  single  item,  $873.61.  The  last  entry  on  the 
debit  side  is  not  actual,  but  hypothetical.  It  adds  to  the  interest 
revenue  artificially  a  sum  which  is  also  artificially  added  to  the 
cost  of  rent.  This  shifting  does  not  affect  the  final  result,  or 
net  increase.  Such  transfers  should  be  sparingly  used,  and  with 
great  care. 


86 


THE  PHILOSOPHY  OF  ACCOUNTS 


214.  We  now  establish  a  Trading  account,  a  general  Profit 
and  Loss  account,  and  a  Distribution  account,  and  for  illustra- 
tion make  them  continuous,  merely  bringing  down  balances.  We 
also  insert,  in  the  English  style,  the  qualifications  "Dr."  and 
"Cr.,"  "By"  and  "To,"  which  are  occasionally  met  with  in 
this  country. 

FIGURE  38 


DR. 


TRADING,  PROFIT  AND  LOSS,  AND 

DISTRIBUTION  ACCOUNT 

1907 


CR. 


To  Salaries 

"  Delivery 

"  Insurance  [on  stock] . 

"  Interest 

"  Fuel 

"  Light 

"  Supplies 

"  Real  Estate  Expense 
in  lieu  of  rent 

"  Profit  and  Loss  carried 
down.  . 


$4,000.00 

987.56 

99-50 

87.50 

279.50 
463.84 

873-61 

$7,156.51 

8,364-15 


$15,520.66 
To  Distribution $8,874.15 


To  Dividend. 
"  Surplus. . 


£8,874.15 

i>6,ooo.oo 
2,874-15 

58,874.15 


By  Profit  on  Sales $15,520.66 


$15,520.66 

By     Trading,     brought 

down $8,364.15 

Interest 510.00 

$8,874.15 
By  Profit  and  Loss $8,874.15 


,874.15 


215.  This  highly  technical  form  of  presentation  is  less  suit- 
able for  the  information  of  the  public  and  of  those  interested  than 
the  analytical  statement  shown  in  Figure  39. 

216.  Where  it  is  possible,  the  bookkeeping  should  be  so 
planned  that  the  items  for  each  economic  account  shall  be 


THE  ECONOMIC  SUMMARY  87 

grouped  into  monthly  totals  preparatory  to  posting  to  that  ac- 
count, instead  of  a  long  list  of  smaller  items.  This  monthly 
grouping,  which  will  be  dwelt  upon  hereafter,  is  more  important 
in  these  accounts  than  in  the  specific  accounts.  It  is  also  desir- 
able to  eliminate  corrections  and  offsets  before  the  totals  are 
carried  to  the  final  account.  When  this  is  done,  the  accounts  of 
outlay  and  income  can  readily  be  thrown  into  a  tabular  or 
synoptical  form. 

FIGURE  39 
SUMMARY  OF  THE  ECONOMIC  ACCOUNTS 


From 
Page 


1907 


GROSS  PROFIT  on  sales $15,520.66 

OUTLAY: 

Salaries $4,000.00 

Delivery 987.56 

Insurance  on  Stock 99-5° 

Fuel 365.00 

Light 279.50 

Supplies 463.84 

Interest 87.50 

Real  Estate  Expense  in  lieu  of  Rent 873.61 

Total $7,156.51       $7,156.51 

NET  TRADING  PROFIT $8,364.15 

Interest  on  Investments  (including  equity  in  real  estate) .  5 10.00 

Total  Revenue $8,874.15 

DISTRIBUTION: 

Dividend,  $10  per  share  on  600  shares 6,000.00 

Increase  of  Surplus  Account $2,874.15 

Balance  of  Surplus  at  beginning 11,468.43 

at  close..  $14,342.58 


217.  This  tabular  form  may  assume  either  of  the  arrange- 
ments shown  in  Figures  40  and  41. 


88 


THE  PHILOSOPHY  OF  ACCOUNTS 


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THE  ECONOMIC  SUMMARY  89 

218.  To  carry  out  this  plan  in  any  particular  case  will  per- 
haps require  the  introduction  of  special  columns  or  lines  for  ad- 
justment, but  this  general  scheme  of  additions  both  down  and 
across  will  give  a  more  comprehensive  view  of  the  progress  of 
the  business  than  a  number  of  disjected  accounts  in  the  traditional 
form. 


CHAPTER  XIV 
THE  TRIAL  BALANCE 

TEST    OF   EQUILIBRIUM — ORDER   OF    ARRANGEMENT — ACCOUNTANT'S 
ROUGH  STATEMENT  FROM  TRIAL  BALANCE 

219.  In  any  ledger,  if  every  transaction  up  to  a  certain  date 
has  been  fully  and  correctly  posted,  there  must  be  an  exact  equal- 
ity between  the  totals  standing  on  the  debit  side  and  on  the  credit 
side.    The  initial  balances,  taken  from  the  balance  sheet,  were  in 
that  state  of  equilibrium;  and,  as  shown  in  Chapter  IV,  each 
transaction  has  added  equal  amounts  to  the  two  sides. 

220.  It  follows  also  that  if  the  balances,  or  resultants,  of  the 
several  accounts  were  ascertained,  they  would  also  show  the  same 
equality.     For  in  every  account  having  amounts  on  both  sides 
the  process  of  balancing  consists  hi  canceling  an  equal  amount  on 
each  side  and  this  cannot  affect  the  equilibrium  of  the  entire 
system. 

221.  The  equality  of  totals  depends  upon  the  mathematical 
principle  that,  if  equals  be  added  to  equals,  the  wholes  will  be 
equal.    The  equality  of  balances  depends  upon  the  same  principle 
and  also  upon  this  other:  that,  if  equals  be  subtracted  from  equals, 
the  remainders  will  be  equal. 

222.  If  it  is  found,  however,  that  the  sum  of  the  totals,  or  of 
the  balances,  are  not  equal,  there  is  surely  an  error  in  the  contents 
of  the  ledger  or  in  its  summation  or  its  balancing.    But  while 
inequality  is  a  certain  indication  of  error,  equality  is  not  a  certain 
indication  of  correctness,  for  it  is  possible  that  equal  amounts  of 
error  exist  on  the  two  sides. 

223.  A  list  of  total  debits  and  credits  of  each  account  or  a  list 
of  debit  and  credit  balances  is  called  a  "trial  balance,"  and  is  in- 
tended primarily  as  a  test  of  correctness.     Many  use  it  solely  for 

90  ,  - 


THE  TRIAL  BALANCE  9! 

that  purpose,  but  it  may  be  made  to  serve  other  uses  and  to  take 
the  place  of  an  interim  balance  sheet. 

224.  The  trial  balance  must  be  taken  when  the  ledger  is  fully 
written  up.    As  we  shall  explain  hereafter,  in  the  most  perfected 
systems  many  of  the  transactions  are  only  half-posted  in  the 
first  instance,  one  item  of  the  transaction  being  reserved  to  the 
end  of  the  month  and  posted  in  aggregate.    It  follows  that  the 
most  appropriate  date  for  a  trial  balance  is  the  end  of  the  month. 

It  is  quite  usual  to  suspend  all  posting  during  the  taking-off 
of  the  trial  balance;  but  by  affixing  a  special  mark  to  the  last 
entry,  the  posting  routine  may  be  kept  up  without  danger  of  con- 
fusing the  new  matter  with  the  old.  The  three-column  ledger 
(Article  17,  Figure  7)  is  very  convenient  for  this  purpose. 

225.  The  usual  form  of  a  trial  balance  is  as  follows: 

FIGURE  42 
TRIAL  BALANCE 


Page 

Name 

Dr. 

Cr. 

The  columns  "Dr."  and  "Cr."  may  be  filled  either  with 
totals  or  with  balances. 

226.  By  additional  columns  headed  "Dr."  and  "Cr."  in  pairs, 
the  trial  balances  for  several  months  may  be  contained  on  the 
same  page  or  pages,  without  the  necessity  of  rewriting  numbers 
and  names  of  accounts. 

227.  In  order  to  prevent  the  omission  of  accounts  from  the 
trial  balance  it  is  generally  found  best  to  enter  them  in  the  order 
in  which  they  follow  each  other  in  the  ledger.    If  this  order  is 

•    not  systematic  and  logical  very  little  use  can  be  made  of  the  trial 


92  THE  PHILOSOPHY  OF  ACCOUNTS 

balance  except  as  a  test  of  mechanical  correctness  in  posting. 
In  the  modern  unbound  ledger,  consisting  of  loose  cards  or  leaves 
and  admitting  of  shifting  and  rearrangement,  the  ledger  can  be 
kept  in  exact  order;  while  in  the  bound  book,  unless  a  great  deal 
of  space  is  wasted  in  blank  pages,  the  necessary  filling-up  and 
transferring  to  new  pages  is  pretty  sure  to  throw  it  into  more  or 
less  disarrangement. 

228.  It  may  be  thought  preferable  to  arrange  the  accounts 
alphabetically,  taking  the  names  and  pages  from  the  index  and 
then  filling  in  the  amounts  from  the  account. 

229.  Where  there  is  a  system  of  subordinate  ledgers  (Articles 
74-75)  the  trial  balance,  like  the  balance  sheet,  may  profitably  be 
condensed  by  entering  only  the  aggregates.     The  subordinate 
ledger  has  its  own  subordinate  trial  balance  which  proves  the 
correctness  of  its  posting.     Even  if  there  be  no  such  system  of 
subordinate  ledgers,  an  aggregate  may  be  made  up  expressly  for 
the  trial  balance  of  all  the  accounts  of  a  homogeneous  group,  in  a 
list  or  schedule  only  the  total  of  which  appears  in  a  single  line 
of  the  trial  balance. 

230.  We  will  now  give  as  an  example  of  a  condensed  trial 
balance  alphabetically  arranged,  the  supposed  trial  balance  of  the 
Jones  Mercantile  Company  using  the  same  materials  as  in  Article 
210,  and  exhibiting  both  totals  and  balances. 

231.  A  comparison  of  the  balance  column  with  the  balance 
sheet  in  Article  210  will  show  that  they  are  substantially  the  same. 
Had  a  small  adjustment  on  account  of  fuel  on  hand  been  made 
before  the  trial  balance  was  taken  off,  the  only  difference  would 
be  that  the  economic  accounts  stand  with  open  balances  instead  of 
being  closed  into  Surplus,  of  which  they  are  really  adjuncts  and 
offsets. 

232.  When  an  accountant  is  called  in,  and  wishes  to  obtain  a 
rough  statement  of  condition  for  prompt  use,  he  may,  if  a  recent 
trial  balance  is  at  hand,   transform  it  into   a   statement   of 
assets  and  liabilities  by  eliminating  all  the  economic  balances. 


THE  TRIAL  BALANCE 


93 


FIGURE  43 

TRIAL  BALANCE,  JONES  MERCANTILE  COMPANY 
December  31,  1907 


Page 

Name 

TOTALS 

BALANCES 

Dr. 

Cr. 

Dr. 

Cr. 

Accrued  Interest  
Bills  Payable  

$       450.00 
3,000.00 
6,750.00 
5,000.00 

54,696.50 
987.56 

420.00 
169.50 
387-50 

279.50 
126,842.11 

10,000.00 

232-19 
4,000.00 
82,579.28 
463-84 

151.42 
24,826.99 

$        400.00 
10,000.00 
1,500.00 

6o,OOO.OO 
47,052.91 

150.00 

82,579.28 
4,000.00 

240.00 

98,099.94 
11,468.43 

5,745.83 

$          50.00 

5,250.00 
5,OOO.OO 

7,643-59 
987.56 

420.00 
169.50 
387.50 

279.50 
44,262.83 

10,000.00 

232.19 
4,000.00 

463.84 
151.42 
24,826.99 

$    7,000.00 
60,000.00 

150.00 

4,000.00 
240.00 

15,520.66 
11,468.43 

5,745-83 

Bills  Receivable  .... 
Bonds  .  . 

fCapital  Stock  

Cash  

*Delivery  

Dividends  Payable  .  . 
*Fuel  

*Insurance  

*Interest  Cost  

*Interest  Revenue.  .  . 
"Light  

Merchandise  

Mortgage  Payable.  . 
Real  Estate  

*Rent  

"Repairs  ...        

*Salaries  

*Sales  

"Supplies         

fSurplus  

"Taxes           

Customers  Ledger, 
Balances  

Creditors  Ledger, 
Balances  

$321,236.39 

$321,236.39 

$104,124.92 

$104,124.92 

He  will  run  his  pencil  through  all  the  economic  accounts 
(marked*)  and  the  proprietary  accounts  (marked  f)  and 
adding  together  the  remaining  amounts  will  form  the  following 
statement: 


94  THE  PHILOSOPHY  OF  ACCOUNTS 

FIGURE  44 

Accrued  Interest $50.00 

Bills  Payable $7,000.00 

Bills  Receivable 5,250.00 

Bonds 5,000.00 

Cash 7,643-59 

Merchandise 44,262.83 

Mortgage  Payable 4,000.00 

Real  Estate 10,000.00 

Customers  Ledger 24,826.99 

Creditors  Ledger 5,745-83 

Total  Assets $97,033.41 

Total  Liabilities $16,745.83 


Net  Worth $80,287.58 

If  in  the  balance  sheet,  Article  210,  we  add  together: 

Capital $60,000.00 

Surplus 14,342.58 

and  Dividend  Payable 6,000.00 

we  have  the  result $80,342.58 

The  difference,  $55,  is  the  amount  of  fuel  on  hand  for  which 
no  adjustment  had  been  made. 

233.  The  prevention,  detection,  and  correction  of  the  errors 
which  are  known  to  exist  when  the  trial  balance  does  not  agree 
would  naturally  be  the  next  subject  to  be  treated  of;  but  for 
practical  reasons  it  would  be  better  to  defer  its  consideration 
until  the  make-up  of  the  accounts  is  more  fully  discussed. 


CHAPTER   XV 
THE  JOURNAL 

A  PRELIMINARY  BOOK — FORMERLY  CONSIDERED  INDISPENSABLE  AND 
THE  ONLY  SOURCE  OF  POSTING— ANALYSIS  OF  TRANSACTIONS— FORM 
OF  JOURNAL  ENTRIES — BALANCE  ENTRIES  THROUGH  JOURNAL — 
CERTAIN  ENTRIES  FOR  WHICH  THE  JOURNAL  Is  ADVANTAGEOUS- 
GRADUAL  DISAPPEARANCE  OF  THE  JOURNAL — AUXILIARY  BOOKS 
— MONTHLY  JOURNALIZATION  OF  AUXILIARY  BOOKS — POSTING 
DELAYED — DOWNFALL  OF  THE  COMPLETE  JOURNAL 

234.  Thus  far  we  have  treated  of  accounts  only,  and  in  fact 
the  account,  in  the  broad  sense  in  which  I  am  using  the  word,  is 
that  for  which  all  the  processes  of  bookkeeping  exist,  all  else  being 
subsidiary  to  it.    The  tendency  of  modern  accountancy  is  to- 
wards making  all  records  perform  the  functions  of  accounts 
without  any  preliminary  manipulation.    But  until  some  time  in 
the  nineteenth  century,  all  entries  in  the  ledger  were  posted  from  a 
preliminary  book  called  the  journal  and  therefore  in  an  entry  com- 
prising a  single  debit  and  a  single  credit  the  same  amount  was 
written  four  times,  twice  in  the  journal  and  twice  in  the  ledger. 
By  skilful  modifications  of  the  method,  the  same  material  is  now 
entered  not  oftener  than  twice. 

235.  But  even  the  journal  was  not  at  first  the  original  record. 
It  had  as  its  precursor  the  day  book,  which  narrated  the  occur- 
rence without  any  technical  indication  of  the  debits  and  credits 
to  which  it  gave  rise.     Then  the  same  material  was  put  into 
technical  form,  or  as  it  was  said,  "  journalized,"  which  was  con- 
sidered a  momentous  and  difficult  operation.    Finally  the  entries 
in  the  journal  were  severally  posted  to  the  proper  sides  of  the 
ledger  accounts. 

236.  It  was  for  a  long  time  supposed  that  these  three  books, 
the  day  book,  the  journal,  and  the  ledger,  formed  an  indispens- 

95 


96  THE  PHILOSOPHY  OF  ACCOUNTS 

able  triad;  that  without  these  three  "principal  books"  there 
could  be  no  double-entry  bookkeeping,  and  that  all  other  records 
were  "auxiliaries"  to  these.  The  day  book  is  now  practically 
abolished,  and  the  journal  nearly  so.  In  modern  times  the 
original  entry  is  almost  invariably  in  the  form  of  some  kind  of 
paper,  document,  or  voucher,  valuable  as  evidence.  These 
papers  are,  for  all  the  normal,  staple  types  of  transactions,  in 
printed  blanks  and  their  form  points  out  the  place  in  the  books  of 
account  where  they  must  be  entered.  This  is  practicable  in 
modern  business,  where  labor  is  subdivided  and  an  employee 
performs  only  one,  or  a  few  kinds  of  functions;  and  it  makes  the 
entries  self- journalizing. 

237.  The  journal  was  not,  properly  speaking,  a  book  of  ac- 
count, but  a  book  of  detached  entries  to  be  formed  afterwards 
into  accounts.     In  its  original  form,  the  amounts  of  the  several 
entries  were  not  even  added  together,  but  subsequently  this  was 
introduced. 

238.  In  Chapter  IV  the  analysis  of  transactions  was  treated 
and  illustrated.     The  journal  entry  expresses  this  analysis,  stat- 
ing the  titles  of  the  accounts  to  be  debited,  followed  by  the  titles 
of  the  accounts  to  be  credited,  the  two  being  usually  separated 
by  the  words  "Dr.  to." 

Thus  a  purchase  of  merchandise  on  credit  was  entered  as 
follows  in  the  journal: 

56     Merchandise  Dr. 
379  To  A- 


for  purchase  of 

of at    $ 

The  marginal  figures  at  the  left  indicate  the  pages  of  the  Mer- 
chandise account  and  of  A B 's  account  respectively, 

to  which  the  posting  has  been  made. 

239.  Compound  entries,  that  is,  those  containing  more  than 
one  debit  or  more  than  one  credit — usually  contained  the  word 
"  Sundries  "  which  might  easily  have  been  dispensed  with.  Thus, 


THE  JOURNAL  97 

if  Cash  were  to  be  debited  and  Bills  Receivable  and  Interest  were 
both  to  be  credited,  the  phrase  was: 

Cash  Dr.  to  Sundries 

for  proceeds  of  note  of  A B f. . . 

bearing  interest,  etc. 

To  Bills  Receivable         $ 

"  Interest 


This  is  a  very  awkward  form  especially  as  it  brings  the  name  of 
the  account  to  be  debited  far  from  the  sum.  The  more  modern 
form  of  journal,  with  two  money  columns  for  the  debit  and  the 
credit  amounts  respectively,  either  with  or  without  the  words  "to 
Sundries,"  is  greatly  preferable: 

Cash  Dr.  [to  Sundries] $ 

To  Bills  Receivable $ 

"  Interest 

for  proceeds,  etc. 

240.  The  double  money  columns  afford,  through  their  totals, 
the  power  of  ascertaining  whether  all  the  contents  of  the  journal 
have  been  posted  to  the  ledger,  whereas  in  the  detached  form  an 
entire  entry  might  have  been  left  unposted  without  affecting  the 
trial  balance.    The  total  of  the  ledger  should  evidently  equal  the 
total  of  the  journal  if  it  has  all  been  derived  from  that  book,  but 
to  apply  this  test  it  is  necessary  to  use  the  trial  balance  by  totals 
(Article  219),  not  by  balances. 

241.  In  the  rigorous  application  of  the  journal  principle,  every 
entry  to  the  debit  or  credit  side  of  the  ledger  must  invariably 
come  from  the  journal.     This  was  carried  so  far  that  even  the 
striking  of  the  balance  of  an  account  and  bringing  it  down  was 
attended  with  the  same  formality.    The  entry  would  read: 

Smith  &  Jones,  old  account,  Dr. 

To  Smith  &  Jones,  new  account 
or 

Brown  &  Robinson,  new  account,  Dr. 

To  Brown  &  Robinson,  old  account. 

7 


98  THE  PHILOSOPHY  OF  ACCOUNTS 

These  would  be  posted  as  follows,  the  title  of  the  account  not 
being  repeated: 

DR.  SMITH  &  JONES  CR. 


To  new  account . 


By  old  account. 


A  debit  balance  is,  of  course,  brought  down  in  the  reverse  way. 

242.  A  regular  balance  sheet  was  also  the  product  of  journal- 
ization under  the  name  of  the  Balance  account.    All  the  trans- 
fers of  assets  to  the  debit  side  of  the  Balance  account  were 
effected  through  the  journal,  thus: 

Balance  Dr. 

To  Cash 
Balance  Dr. 

To  Merchandise,  etc. 

Each  transfer  of  liability  or  proprietary  account  was  likewise 
made  to  depend  upon  a  journal  entry: 

Bills  Payable  Dr. 

To  Balance 
Mortgage  Payable  Dr. 

To  Balance,  etc. 

243.  It  is  evident  that  the  result  of  posting  these  entries  to  a 
ledger  account  entitled   "Balance"   would  be  to  construct  a 
balance  sheet  on  a  page  of  the  ledger.    This  would  correspond 
in  arrangement  to  the  balance  sheet  used  in  most  parts  of  the 
world  outside  of  England,  not  the  reverse  form  hi  Articles  79 
and  80. 

244.  Usually  this  formality  was  considered  sufficient  and  the 
reopening  of  the  accounts  was  effected  by  simply  bringing  down 


THE  JOURNAL 


99 


the  balance  to  the  opposite  side  as  already  exemplified  in  Article 
5 1 .  But  there  were  those  who  would  have  considered  this  abbre- 
viation heterodox  and  insisted  on  restoring  the  balances  by 
journal  entry.  But  here  a  distinction  must  be  made;  there  must 
be  two  balance  accounts,  the  closing  Balance  and  the  opening 
Balance,  although  the  latter  was  usually  merely  a  prolongation  of 
the  former  within  the  same  lines.  The  opening  Balance  account 
would  be  the  "English"  form  of  balance  sheet,  with  assets  on  the 
right. 

245.  The  journal  entry  for  the  closing  balance  (Article  242) 
was  somewhat  tedious  as  a  complete  entry  was  needed  for  every 
separate   account.    The  compound  entries,   "Balance  Dr.   to 
Sundries"  and  "Sundries  Dr.  to  Balance,"  were  therefore  em- 
ployed to  save  labor.    The  result  will  be  seen  in  the  following 
journalization   of   the  closing  entries  which  would  bring  out 
the  balance  sheet  of  Article    76   hi   the  form  of   a  Balance 
account: 

Balance  Dr.  to  Sundries $51,645.62 

To  Cash $3,506-74 

"  Merchandise 22,166.73 

"  Personal  Debtors  [group  account]  15,972.15 

"  Real  Estate 10,000.00 

Sundries  Dr.  to  Balance 51,645.62 

Mortgage 4,000.00 

James  Jones 47,645.62 

The  entries  for  the  opening  balance  would  be  debit  where 
these  are  credit  and  credit  where  these  are  debit. 

246.  Now,  if  we  post  these  items  exactly  as  given,  the  Balance 
accounts  will  appear  as  follows: 


Dr. 


BALANCE 


Cr. 


To  Sundries $51,645.62 

To  Sundries $51,645.62 


By  Sundries $51,645.62 

By  Sundries $51,645.62 


100  THE  PHILOSOPHY  OF  ACCOUNTS 

This  account  is  as  nearly  useless  as  it  can  be.  It  really  gives 
no  information  as  to  the  status,  for  which  reference  would  have 
to  be  made  to  the  journal,  which  in  its  legitimate  use  is  not  a 
book  of  reference  but  a  source  of  material  for  the  ledger. 

247.  No  wonder  then  that  some  bookkeepers  "cut  out"  the 
Balance  accounts  altogether  and  made  a  "Sundries  to  Sundries" 
entry  as  follows: 

Closing  Entry 
Sundries  Dr.  to  Sundries 

Mortgage  Payable $4,000.00 

James  Jones 47,645.62 

To  Cash $3,506.74 

"  Merchandise 22,166.73 

"  Personal  Debtors 15,972.15 

"  Real  Estate 10,000.00 

Opening  Entry 
Sundries  Dr.  to  Sundries 

Cash 3,506.74 

Merchandise 22,166.73 

Personal  Debtors 15,972.15 

Real  Estate 10,000.00 

To  Mortgage  Payable 4,000.00 

"  James  Jones 47,645.62 

248.  Thus  we  see  that  the  Balance  account  in  the  ledger  was 
first  made  useless  and  finally  eliminated  altogether  by  reason  of 
the  inconvenience  of  the  journal.    But  a  modification  in  the  form 
of  the  journal,  which  a  few  were  bold  enough  to  adopt,  might 
have  remedied  this  defect  and  enabled  the  Balance  account  to 
become  a  true  balance  sheet. 

249.  The  most  effective  way  to  do  this  is  to  place  the  titles  of 
the  accounts  in  the  center  without  dropping  a  line,  and  the 
amounts  on  the  outside  of  the  page.    In  this  way  the  components 
of  the  balance  sheet  are  posted  in  detail. 

This  form  of  journal  is  so  much  more  compact  and  compre- 
hensible than  the  old  one,  that  in  future  illustrations  it  will  be 
employed. 


THE  JOURNAL 
FIGURE  45 


101 


Amount 
Dr. 

Dr. 

Accounts             Cr. 
December  31 

Amount 
Cr. 

$3,506.74 

Balance 

Cash 

$3,506.74 

22,166.73 

" 

Merchandise 

22,166.73 

15,972.15 

ii 

Personal  Debtors 

15,972.15 

10,000.00 

" 

Real  Estate 

10,000.00 

4,000.00 

Mortgage  Payable 

Balance 

4,000.00 

47,645.62 

James  Jones 

ii 

47,645.62 

250.  It  is  doubtful,  however,  if  there  is  any  utility  in  making 
closing  entries  on  the  journal,  so  far  as  balances  are  concerned. 
Having  tested  the  accuracy  of  the  posting  and  having  adjusted 
any  valuations  requiring  it,  the  balances  may  be  simply  brought 
down  and  transcribed  into  their  proper  places  in  the  balance 
sheet. 

251.  There  still  remain  certain  ulterior  transfers  in  which  the 
journal  is  used  to  advantage: 

1.  Incidental  transfers  from  one  account  to  another,  not 

comprised  in  the  regular  "run"  of  the  business. 

2.  Opening  entries  expressing  hi  corporation  and  capital- 

ization. 

3.  Adjustment  of  values  which  have  been  roughly  carried. 

This  always  changes  specific  value  to  economic,  or 
vice  versa. 

4.  Closing  the  economic  accounts  into  a  summary,  profit 

and  loss,  or  trading  account. 

5.  Distributing  the  net  income  or  loss  to  whom  it  may 

concern. 

252.  Cases  3,  4,  and  5  may  be  illustrated  by  journalizing 
some  interior  transactions  which  may  be  supposed  to  result  in  a 
trading  account. 

i.  A   specific   residue   in   an   account  which   is  normally 
economic. 


102 


THE  PHILOSOPHY  OF  ACCOUNTS 


$55.00 Fuel,  new  account Fuel,  old  account $55.00 

for    coal    on    hand    as    per    inventory 

50.00 Interest,  new  account Interest,  old  account 50.00 

for  interest  earned  but  uncollected,  etc. 

The  effect  of  the  "old  account"  entries  will  be  to  increase 
the  amount  of  the  net  earnings  from  these  respective  accounts. 

2.  Creation  of  a  special  economic  account  for  ascertaining 
the  cost  in  lieu  of  rent.     The  entries  for  this  purpose  have  been 
indicated  hi  Article  213. 

3.  Transfer  of  all  economic  accounts  into  a  summary. 


$15,520.66    Sales Trading 

4,000.00    Trading Salaries 

987.56          "       Delivery 

99.50          "       Insurance 

87.50          "       Interest 

365.00          "       Fuel 

279.50          "       Light 

463.84          "       Supplies 

873.61  "       Real  Estate  Expense . .  . 


$15,520.66 

4,000.00 

987-56 

99-50 
87.50 
365.00 
279.50 
463.84 
873-61 


to  close  all  outlay  and  income  accounts  relating  to  merchandise 

$8,364.15     Trading Profit  and  Loss $8,364.15 

to  close  Trading  account 

$510.00    Interest ProfitandLoss $510.00 

for  income  outside  of  mercantile  business 

$8,874.15     Profit  and  Loss Distribution $8,874.15 

6,000.00     Distribution Dividends  Payable 6,000.00 

for  dividend  declared  December  27,  at  $10  per  share 

$2,874.15     Distribution Surplus $2,874.15 

to  close  Distribution  account. 

253  •  By  comparing  these  entries  with  the  accounts  in  Article 
209  it  will  be  seen  that  the  use  of  the  journal  might  largely  have 
been  dispensed  with,  since  the  effect  is  merely  analytical — a  plac- 
ing of  the  material  in  new  combinations  rather  than  the  recording 
of  any  new  acts  or  facts.  The  declaration  of  the  dividend  is  the 
only  administrative  act  which  is  recorded  as  taking  place;  all  else 
is  arithmetical  process,  which  might  have  been  carried  on  in  the 
accounts  themselves. 


THE  JOURNAL  IO3 

254.  Beginning  now  with  the  original  journal,  which  con- 
tained a  record  of  every  occurrence,  one  by  one,  we  may  trace  its 
evolution  and  final  disappearance. 

255.  It  is  very  probable  that,  when  the  contents  of  the  day 
book  were  translated  day  by  day  into  the  technical  language  of 
the  journal,  the  process  of  condensation  began  by  grouping  to- 
gether transactions  of  the  same  kind  into  a  compound  entry. 
Thus  if  there  were  on  a  certain  day  four  persons  who  purchased 
goods  on  credit,  the  entry  became: 

$229.43  A  B   ] 

100.00  CD!    A,    , 

736.50  E  F         Merchandise $1,09577 

29.84  G  H  J 
instead  of: 

$229.43  A  B          Merchandise $229.43 

100.00  CD                   "         loo.oo 

736.50  E  F                     "         736.50 

29.84  G  H                               29.84 

Only  one  posting  to  the  Merchandise  account  was  necessary 
instead  of  four,  and  this  one  posting  actually  gave  more  valuable 
information  than  the  four. 

256.  The  next  step  in  condensation  was  to  break  up  the  day 
book  into  several  special  books,  such  as  the  sales  book,  the  in- 
voice book  (more  properly  purchase  book),  the  cash  book,  each 
devoted  to  transactions  of  a  certain  type.    The  sales  book  con- 
tained only  entries  which  would  in  the  journal  appear  as  debits 
to  persons  and  credits  to  merchandise  ( or  in  more  modern  times 
to  Sales  account),  and  similarly  with  the  invoice  book  and  the 
cash  book,  leaving  the  day  book  merely  for  those  few  transac- 
tions which  did  not  concern  either  cash  or  merchandise.    If 
there  still  remained  in  the  day  book  any  other  class  of  entries 
which  recurred  frequently  enough  to  make  it  worth  while,  an- 
other book  was  opened  for  this  class. 

257.  These  books  were  called  "auxiliary"  books,  the  journal 
being  still  considered  as  the  most  important  book,  in  fact,  as  the 


104  THE  PHILOSOPHY  OP  ACCOUNTS 

book.     Nevertheless  vastly  more  information  was  obtainable 
from  the  auxiliaries  than  from  the  journal. 

258.  As  it  was  considered  inadmissible  that  anything  should 
get  into  the  ledger  except  through  the  journal,  the  contents  of  all 
these  auxiliary  books  had  to  be  journalized,  and  this  came  to  be 
done  monthly  as  the  most  convenient  tune.     The  cash  book  gave 
rise  each  month  to  two  long  entries: 

Sundries  Dr.  to  Cash 
and 

Cash  Dr.  to  Sundries 

the  sales  book  became 

Sundries  Dr.  to  Merchandise 
[or  Sales] 

the  invoice  book  became  an  entry : 

Merchandise  Dr.  to  Sundries 

and  in  this  manner  the  day  book  contained  only  few  exceptional 
entries  not  provided  for  elsewhere. 

259.  This  monthly  journalization  necessitated  monthly  post- 
ing but  was  attended  by  the  inconvenience  that  the  posting  was 
always  in  arrears,  so  far  as  related  to  the  personal  accounts. 
These  exterior  accounts  are  the  very  ones  which  should  be  kept 
closely  up  to  date  and  to  some  extent  they  were  always  a  month 
behind.     Where  the  work  was  voluminous,  the  trial  balance  could 
hardly  be  verified  until  a  month  after  its  date. 

260.  This  inconvenience  proved  the  downfall  of  the  journal. 
Probably  the  posting  was  short-circuited  direct  to  the  ledger 
account,  in  advance  of  its  being  journalized,  this  posting  being 
considered  as  an  anticipation  of  the  regular  process. 

Since  the  auxiliary  book  contained  a  total,  which  could  also 
be  posted  directly,  it  became  evident  that  the  journal  as  such  was 
a  superfluity. 


CHAPTER  XVI 

POSTING  MEDIUMS 

AUXILIARY  BOOKS  BECOME  SUBDIVISIONS  OF  THE  JOURNAL— SPHERE  OF 
JOURNAL    Now    LIMITED— DISAPPEARANCE  OF  DAY  BOOK— PRE- 

DIGESTION  OF   MATERIAL—  COLUMNIZATION— COLUMNAR  JOURNAL— 

SIDE-POSTING—LOOSE-LEAF  JOURNAL — CASH  BOOK  USED  AS  JOUR- 
NAL— CASH  SALES 

261.  The  so-called  "auxiliary"  books  instead  of  being  sub- 
divisions of  the  day  book  now  became  subdivisions  of  the  journal. 
It  will  be  better  to  leave  the  name  "journal"  to  the  original 
book,  surviving  in  a  limited  sphere  of  utility,  and  call  all  the 
books  from  which  the  ledger  accounts  are  derived  "posting 
mediums." 

262.  The  day  book  has  now  disappeared.    The  cash  book  is 
used  as  a  posting  medium  for  all  receipts  and  payments;  the  sales 
book  for  all  sales;  the  invoice  book  for  all  purchases.    There 
may  also  be  bills  receivable  and  payable  journals;  returned  goods 
books,  both  outward  and  inward;  deposit  books,  draft  books, 
interest  journals;  in  short,  an  infinite  variety  of  special  posting 
mediums.     In  each,  the  separate  items  are  kept  posted  from  day 
to  day,  while  the  monthly  totals  are  posted  to  the  opposite  side  in 
a  single  sum.    And  this  is  the  ideal  result,  for  the  exterior  ac- 
counts should  be  kept  perfectly  posted  up  to  the  very  moment, 
while  the  interior  accounts,  kept  for  instruction,  are  more  useful 
if  totalized  by  months  and  by  days. 

263.  Such  is  the  modern  business  method:  instead  of  dump- 
ing the  raw  material  of  transactions  into  a  day  book  to  be  thence 
digested  by  journalization,  it  is  predigested  by  being  in  the  first 
instance  distributed  among  specialized  books  of  original  entry. 
These  books  build  up  the  ledger  accounts,  contributing  daily 

105 


106  THE  PHILOSOPHY  OF  ACCOUNTS 

details  and  monthly  aggregates;  some  of  them,  like  the  cash  book, 
are  themselves  accounts  dissevered  from  the  rest  of  the  ledger. 

264.  While  the  two  processes  of  analyzing  the  transaction  into 
its  debits  and  credits  and  of  combining  those  of  like  nature  were 
becoming   facilitated   by   the   adoption   of   numerous   posting 
mediums  in  place  of  the  single  journal,  another  solution  of  the 
problem  was  developing;  namely,  the  equipping  of  the  books  of 
original  entry  with  additional  money  columns  for  distribution 
and  aggregation.    This  was  applied  in  some  cases  to  the  journal 
which  continued  to  be  the  sole  posting  medium,  and  in  others  to 
the  specialized  mediums  which  had  taken  over  part  of  the  func- 
tions of  the  journal.    Thus  the  simplification  of  the  journal  de- 
veloped on  two  distinct  lines:  the  introduction  of  separate  and 
specialized  books,  and  the  introduction  of  separate  and  specialized 
columns. 

265.  Looking  through  the  pages  of  any  journal,  it  will  be  seen 
that  a  few  accounts  appear  in  the  majority  of  the  items.     If, 
then,  we  add  an  extra  column  for  each  of  these  often-recurring 
accounts  and  insert  all  other  items  in  the  ordinary  columns,  we 
may  defer  posting  such  frequent  accounts  till  the  end  of  the 
month,  or  as  long  as  we  please.     For  a  columnar  journal  of  this 
type  the  arrangement  shown  in  Article  249,  Figure  45,  where  the 
money  columns  are  placed  on  the  outside  and  the  wording  in 
the  middle,  is  often  advantageous.    Supposing  cash,  merchandise, 
debits  to  expense,  and  credits  to  interest  to  be  the  frequently  re- 
quired postings,  the  arrangement  might  be  as  shown  in  Figure  46. 

266.  The  word  "Sundries"  is  here  used  to  denote  all  other 
accounts    than    cash,    merchandise,    expense,    and    interest. 
Amounts  in  the  Sundries  columns  are  separately  posted  to  the  re- 
spective accounts  and  in  order  to  trace  them  a  folio  column  is 
ruled  next  to  those  columns.    At  the  bottom  of  the  page  the 
addition  of  each  column  is  made  and  the  totals  carried  forward 
to  the  head  of  the  next  page.    If  correct,  the  sum  of  the  debits 
will  be  equal  to  the  sum  of  the  credits.    The  totals  of  the  special 


POSTING  MEDIUMS 


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THE  PHILOSOPHY  OF  ACCOUNTS 


columns  will  be  posted  in  a  lump  at  the  end  of  the  month,  thus 
saving  much  labor  and  turning  of  leaves. 

267.  Besides  this  economy  of  time  and  space,  the  columnar 
method  is  useful  for  keeping  group  accounts  and  subordinate 
accounts  without  the  formality  of  two  grades  of  ledger. 

For  example,  in  discussing  James  Jones'  balance  sheet 
(Figure  19),  we  found  a  composite  item  consisting  of  amounts 
due  from  various  personal  debtors,  $15,972.15.  This  is  the  ag- 
gregate of  numerous  individual  accounts.  Now  if  two  special 
columns  had  been  provided  in  the  columnar  journal  and  entitled 
(say)  "Accounts  Receivable,  Dr.,"  and  "Accounts  Receivable, 
Cr.,"  the  aggregate  might  be  ascertained  at  any  time  from  the 
totals  of  these  columns  by  balancing;  the  items  being  also  posted 
to  the  individual  accounts,  as  noted  in  the  folio  columns. 

268.  To  obtain  the  aggregate  balance  at  the  end  of  each 
month  the  balance  at  the  beginning  would  be  placed  under  the 
total  of  the  debit  column  and  then  the  balance  struck: 

FIGURE  47 


ACCOUNTS 

RECEIVABLE 

Dr. 

ACCOUNTS 

RECEIVABLE 

Cr. 

_^ 

[Total  for  month] 
Balance 
brought  forward 

[Total  for  month] 
Balance 
carried  forward 

By  bringing  the  previous  balance  under  the  column  instead 
of  bringing  it  to  the  top,  we  preserve  the  monthly  total  clear  and 


POSTING  MEDIUMS  109 

distinct.    The  same  device  is  also  useful  in  other  than  columnar 
books. 

269.  More  usually,  however,  the  monthly  totals  are  posted  to 
a  formal  general  ledger  account,  as  will  be  explained  hereafter. 

270.  There  is  danger  of  overdoing  the  principle  of  columni- 
zation.      If  we  attempt  to  carry  too  many  columns,  the  neces- 
sity of  adding  them  up  after  a  very  few  entries  in  each  introduces 
a  great  many  useless  figures.    In  a  great  number  of  columns  ex- 
tending a  long  distance  across  the  page  there  is  danger  also  of 
inserting  the  amount  in  the  wrong  column. 

271.  In  a  multi-columnar  journal  there  is  great  waste  of 
space;  for  with  ten  columns,  nine-tenths  of  each  column,  on  an 
average,  must  be  vacant.    If  we  get  rid  of  the  idea  that  each 
amount  must  necessarily  come  exactly  in  line  with  its  descriptive 
entry,  we  can  carry  a  large  number  of  accounts  by  the  process  of 
side-posting. 

272.  Suppose  an  ordinary  journal  with  two  money  columns 
only,  but  occupying  the  left-hand  pages  alone,  the  right-hand 
pages  being  devoted  to  the  side-posting  or  analysis.    There  are, 
say,  thirty  lines  to  the  page.    Let  the  right-hand  page  be  ruled 
in  four  columns,  two  for  the  analysis  of  debits  and  two  for  the 
analysis  of  credits.    There  will  then  be  sixty  lines  in  which  to 
enter  the  thirty  possible  debits,  and  sixty  lines  for  the  thirty 
possible  credits,  so  that  there  will  be  ample  room,  allowing  for 
names  of  accounts  and  for  totals  brought  and  carried  forward. 
But  the  side-posting  must  be  done  one  account  at  a  time,  and 
only  when  the  journal  page  is  complete.    Suppose,  for  example, 
that  we  begin  with  debits  to  Cash.    We  write  at  the  top  in  red 
the  amount  brought  from  the  previous  page;  then  passing  down 
the  journal  we  post  every  debit  to  Cash  until  we  have  exhausted 
them,  checking  each  as  we  do  so.    When  the  last  has  been  posted, 
we  either  add  these  debits  together  in  red  or  leave  a  line  for 
doing  so  later.    Next  we  take  up  another  account,  say  Expense, 
and  pick  out  all  the  debits  relating  to  that  account.    We  shall 


1 10  THE  PHILOSOPHY  OF  ACCOUNTS 

finally  have  the  entire  contents  of  the  journal  classified  into 
columns,  but  these  will  be  solid,  compact  columns,  not  the 
straggling  ones  produced  by  the  ordinary  columnization.  (See 
Figure  48.) 

273.  The  loose-leaf  principle  may  also  be  utilized  to  classify 
the  journal  while  retaining  its  time-honored  form.    Each  fre- 
quently recurring  type  of  entry  may  be  assigned  to  a  separate 
page  and  additional  pages  inserted  as  these  fill  up,  so  that  on  the 
last  day  of  the  month  it  is  only  necessary  to  complete  the  entries 
by  addition,  they  having  already  been  posted  in  detail. 

If,  for  example,  the  charging  of  interest  on  personal  accounts 
is  one  of  the  normal  entries  regularly  occurring,  a  loose-leaf 
journal  page  is  headed: 

Sundries  Dr.  to  Interest 

and  each  charge  of  that  nature  is  entered  thereon  as  it  occurs, 
with  uniform  specifications  which  may  be  columnized  to  suit  the 
requirements.  The  posting  of  the  debits  is  kept  up  day  by  day. 
As  the  pages  fill  up,  others  are  inserted  and  the  additions  made 
continuous  to  the  end  of  the  month  when  the  compound  entry 
is  completed. 

274.  In  this  way,  we  have  the  same  results  as  in  monthly 
journalization,  without  the  delay  incident  to  that  plan  (Articles 
258,  259).    But  in  the  rigidly  bound  book  this  would  have  been 
impracticable,  as  the  space  required  for  each  class  of  entry  could 
not  be  predetermined;  if  too  much  space  were  allowed,  there 
would  be  waste;  if  too  little,  confusion  and  intermingling.    There 
is  an  elasticity  which  is  of  great  advantage  in  the  modern  method 
of  first  preparing  the  sheets  and  then  binding  them  into  books 
rather  than  binding  first  and  then  accommodating  the  writings 
to  them. 

275.  Recurring  to  the  direct  posting  mediums,  or  partial 
journals,  such  as  cash  book  and  sales  book,  it  may  be  observed 
that  in  many  kinds  of  business  the  cash  book  may  be  made  to 


POSTING  MEDIUMS 


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112  THE  PHILOSOPHY  OF  ACCOUNTS 

contain  all  the  entries  for  which  the  journal  has  been  kept  open, 
as  stated  in  Article  251,  thus  completely  abolishing  the  journal. 
The  cash  book  is  eligible  for  this  office,  since  it  is  a  complete  ac- 
count, having  both  sides.  A  fictitious  receipt  of  money  is  entered 
on  the  one  side  and  is  compensated  by  a  fictitious  payment  on  the 
other  side.  Thus,  in  a  bank  which  pays  interest  on  deposits,  the 
usual  formula  is: 

Interest/Depositors 
But  this  may,  instead  of  a  journal  entry,  be  two  cash  book  entries: 

Interest/Cash 
Cash/Depositors 

as  if  the  bank  had  paid  the  amounts  of  interest  to  the  depositors 
and  they  had  redeposited  the  same.  In  fact,  many  banks  do 
actually  draw  checks  for  the  interest  and  send  them  to  each  de- 
positor; if  the  depositor  (as  oftenest  happens)  sends  back  the 
check  indorsed  for  deposit  the  fact  in  these  banks  coincides  with 
the  fiction  in  the  former  class.  Objection  may  be  made  to  this 
journalization  by  means  of  a  pair  of  cash  entries,  that  it  inflates 
both  sides  of  the  Cash  account  by  the  same  amount.  This,  how- 
ever, is  not  considered  a  very  great  evil.  Those  who  are  very 
punctilious  as  to  keeping  the  cash  "pure"  may  place  the  amounts 
of  such  entries  outside  of  the  Cash  column  to  exclude  them  from 
its  total,  or  may  write  them  in  colored  ink  with  the  same 
purpose. 

276.  Where  several  posting  mediums  are  used,  it  will  happen 
that  there  are  entries  which  affect  two  of  the  posting  mediums, 
for  example,  sales  for  cash,  where  there  is  no  known  person  to 
be  charged  for  the  sale  and  to  be  credited  for  the  cash.  This 
seems  to  have  presented  a  difficulty  for  some  writers  on  book- 
keeping, and  they  have  set  forth  two  remedies.  The  one  is  not 
to  make  any  entry  in  the  sales  book  at  all,  but  to  post  cash  sales 
direct  to  the  Sales  account  in  the  ledger.  This  makes  the  sales 


POSTING  MEDIUMS  113 

book  an  incomplete  record  of  sales  and  destroys  the  unity  of  the 
total  sales  entry  in  the  ledger.  The  other  way  is  to  establish  an 
account  representing  the  purchasers  for  cash,  entitled,  perhaps, 
"  Cash  Sales."  This  is  debited  in  the  usual  course  from  the  sales 
book  and  credited  from  the  cash  book. 

But  it  seems  to  me  that  these  devices  are  entirely  useless  and 
that  no  posting  is  needed.  If  we  look  upon  the  cash  book  as  a 
Cash  account,  the  debit  to  Cash  is  already  made;  if  we  look  upon 
the  sales  book  as  a  segment  of  the  Sales  account,  that  credit  is 
effected.  All  that  is  necessary  is  to  mark  the  cash  entry  and  the 
sales  entry  each  as  the  posting  of  the  other. 

277.  Any  "  auxiliary  "  book  may  almost  invariably  be  treated, 
not  merely  as  a  posting  medium,  but  as  an  actual  account,  or 
half-account  in  detail,  although  there  may  be  a  more  condensed 
account  in  the  ledger.  Especially  is  this  view  requisite  when  we 
consider  postings  as  made  from  the  original  papers  which 
represent  transactions, 
s 


CHAPTER  XVII 
POSTING  FROM  TICKETS 

DOCUMENTARY  RECORD — TICKET  POSTING  A  MODERN  METHOD — VALUE 
OF  VOUCHERS — ADVANTAGES  OF  TICKET  POSTING — SUPPRESSION  OF 
DETAILS 

278.  As  I  have  already  said,  in  modern  business  the  primary 
record  of  any  normal  transaction  is  made  on  a  paper  of  some 
kind.    These  papers  for  the  most  part  have  an  evidential  value : 
they  are  proof  of  some  fact  and  constitute  vouchers  between  the 
concern  and  its  subordinates  or  those  outsiders  who  do  business 
with  it — the  conegotiants.    The  latter  are  the  more  valuable, 
but  the  highest  degree  of  value  in  a  voucher  is  attained  when  it 
embodies  admissions,  adverse  to  themselves,  on  the  part  of  the 
conegotiant  in  the  transaction  and  of  every  subordinate  who 
has  to  do  with  it;  when  everyone  who  is  charged  with  value 
admits  his  responsibility,  and  everyone  claiming  value  defines 
the  extent  of  his  claim  in  writing.    The  subject  of  the  voucher 
is  a  most  important  one,  especially  to  the  auditor,  and  is  con- 
stantly assuming  greater  importance.    A  large  part  of  the  busi- 
ness world  is  at  the  stage  where  the  only  vouchers  recognized 
are  those  for  cash  paid.    It  is  beginning,  however,  to  be  gen- 
erally seen  that  when  cash  is  received,  some  other  value  is  given 
and  that  an  acknowledgment  of  this  other  value  is  desirable; 
hence  the  voucher  with  cash  is  coming  to  be  exacted  as  well  as 
the  voucher  for  cash.    For  example,  a  bank  files  the  deposit  slip 
which  is  a  voucher  with  cash,  as  well  as  the  checks,  which  are  a 
voucher  for  cash. 

279.  But  this  is  not  the  place  for  the  treatment  of  business 
papers  as  vouchers;  it  is  solely  their  use  as  posting  tickets,  irre- 
spective of  serving  as  evidence,  with  which  we  are  now  concerned. 

114 


POSTING  FROM  TICKETS  115 

The  use  of  the  ticket  as  a  posting  source  is  a  modern  develop- 
ment. Forty  years  ago,  although  the  ticket  existed,  it  was  used 
only  once;  it  was  "written  up"  in  the  day  book,  or  in  the  journal, 
or  in  the  auxiliary,  as  the  case  might  be,  but  thereafter  it  was 
dead.  No  posting  was  considered  legitimate  unless  it  was  from 
book  to  book.  Even  the  banks,  having  written  up  deposit  slips, 
remittance  letters,  checks,  and  drafts  in  books  called  "debit  cash " 
and  "credit  cash,"  posted  the  depositors'  accounts  from  these 
clumsy  books  and  not  from  the  easily  handled  tickets,  as  is  now 
universally  done. 

280.  The  thorough  application  of  the  voucher  principle  re- 
sults hi  a  paper  for  every  transaction  which  occurs,  even  those 
known  as  journal  entries.     If  the  auditor  finds  such  a  complete 
set  of  vouchers,  conveniently  arranged,  he  can  make  himself  in- 
dependent of  the  books;  he  can  arrive  at  results  which  will  verify, 
or  disprove,  the  results  of  the  books  far  more  effectually  than 
the  old  plan  of  "ticking  off"  and  may  readily  introduce  a  differ- 
ent and  instructive  point  of  view  by  reclassification. 

281.  In  a  thorough-going  ticket  system,  the  distinction  be- 
tween "  wri ting-up  "  and  posting  vanishes  and  every  ticket  is  sim- 
ply entered  in  every  place  where  it  should  be,  at  least  twice,  often 
more  times.   The  state  of  the  books  is  just  the  same  as  if  one  of 
the  entries  had  been  made  through  a  posting  medium.  It  cannot 
always  be  told  afterwards  which  process  was  actually  employed. 

282.  The  ticket,  or  voucher,  should  have  appropriate  places 
for  noting  the  fact  of  the  postings  having  been  made,  either  by  a 
reference  number  or  letter,  or  by  a  check  mark.    All  tickets  of  a 
certain  form  may  in  some  cases  be  provided  with  a  serial  number 
so  as  to  determine  the  order  of  occurrence  if  necessary;  or  again, 
when  made  up  from  outside,  such  order  of  rotation  may  be 
denoted  by  a  numbering  or  dating  mechanism,  to  be  applied  as 
they  come  in. 

283.  The  practical  advantages  of  posting  from  ticket  to  book 
over  posting  from  book  to  book  are  as  follows: 


116  THE  PHILOSOPHY  OF  ACCOUNTS 

1.  The  ticket  is  brought  with  the  left  hand  close  to  the  point 
where  the  entry  is  made  so  that  there  is  no  need  to  rely  on  memory 
even  for  the  brief  space  of  time  it  takes  to  pass  from  the  page  of  a 
book  to  the  page  of  another  book.    This  brief  time  is  sufficient 
to  cause  many  errors,  from  the  prototype  and  the  copy  not  being 
under  the  eye  at  the  same  moment. 

2.  The  tickets  may  and  should  be  assorted  into  an  order 
which  will  go  straight  through  the  ledger  without  wandering 
back  and  forth.    A  great  part  of  the  bookkeeper's  time  is  wasted 
in  the  physical  exercise  of  turning  leaves.    This  advantage  at- 
tends also  the  loose-leaf  systems  of  accounts  where  a  regular 
consecution  can  be  maintained. 

3.  As  only  one  of  the  tickets  at  a  time  is  exposed  to  view,  the 
eye  does  not  so  easily  lead  to  error  by  f  ailing  upon  a  wrong  amount 

4.  Tickets  can  be  distributed  and  several  bookkeepers  work 
on  them  at  the  same  time;  whereas  with  a  bound  book  one  must 
wait  for  another. 

284.  The  keeping  of  the  tickets  after  use  requires  considera- 
tion and  it  is  important  to  instal  a  good  filing  system.    The 
simplest  is  to  file  by  date,  and  this  will  do  where  reference  is 
seldom  required.    It  may  be  hi  packages,  in  envelopes,  in  scrap 
books  or  vertically  in  drawers  or  boxes,  tickets  of  the  same 
model  being,  of  course,  kept  together.    Either  of  these  plans  may 
also  be  used  when  the  assorting  is  done  by  accounts.    An  in- 
genious combination  of  posting  and  filing  is  where  the  account  is 
kept,  instead  of  a  card,  on  an  envelope  in  which  are  filed  the 
vouchers,  these  being  of  the  kind  which  are  returned  to  the 
debtor  on  payment.    This  plan  is  used  in  clubs,  where  the  mem- 
bers' tickets  for  supplies  go  inside  the  envelope  and  the  account 
on  the  outside.    When  the  bill  is  rendered,  nothing  more  goes 
in  or  on  that  envelope.    When  paid,  it  is  returned,  with  contents, 
to  the  member,  a  new  one  being  started. 

285.  When  the  vouchers  are  filed  by  dates  in  a  monthly 
bundle,  a  cover,  or  jacket,  may  be  used,  having  on  its  outside  a 


POSTING  FROM  TICKETS  117 

summary  or  a  journalization  of  the  contents,  making  a  posting 
ticket  for  the  general  ledger.  Inside  may  be  a  detailed  list  of  the 
vouchers  for  the  use  of  any  auditing  authority. 

286.  Some  vouchers,  used  as  posting  tickets,  have  ultimately 
to  be  past  on  as  vouchers  to  someone  else,  like  the  club  tickets 
mentioned  above.    In  this  case  a  duplicate  is  often  retained  for 
permanent  record  and  reference;  and  if  this  can  be  in  facsimile, 
as  by  the  carbon  or  copying  press  methods,  it  is  all  the  better. 

287.  The  preserving  of  the  original  or  duplicate  tickets  often 
renders  it  unnecessary  to  make  any  detailed  entry  in  the  books, 
but  simply  the  amount.    Thus,  it  was  formerly  customary  to 
copy  each  bill  of  goods  sent  out  into  the  sales  book;  but  the  more 
modern  practice  is  to  enter  there  and  in  the  purchaser's  account 
merely  the  total  sold,  without  specification  of  items  or  prices. 
Again,  the  totaling  of  the  sales  themselves  is  rapidly  performed 
by  listing  them  on  one  of  the  modern  adding  machines  which 
give  an  automatic  total.    If  the  machine  has  the  additional 
feature  of  combining  with  the  adder  a  typewriter  for  the  names, 
the  basic  accounts  (those  represented  by  posting  mediums)  are, 
hi  the  loose-leaf  methods,  entirely  posted  by  machine. 


CHAPTER  XVIII 
THE  LEDGER 

AN  ORGANIZED  SYSTEM — INCOMPLETE  LEDGER — SOMETIMES  INCOMPLETE- 
NESS ONLY  APPARENT — GRADES  OF  ACCOUNTS — SUBORDINATE 
LEDGERS — CONTROLLING  ACCOUNT — GENERAL  AND  SUBORDINATE 
LEDGER  IN  THE  SAME  LOOSE- LEAF  BOOK — PRIVATE  LEDGER — 
TABULAR  LEDGER 

288.  Having  treated  of  the  nature  of  accounts,  their  construc- 
tion, classification,  relation,  and  interdependence,  it  remains  to 
speak  of  them  as  an  organized  system  or  ledger,  which  when  com- 
plete is  capable  of  recording  all  the  occurrences  within  a  given 
sphere  of  proprietorship. 

289.  The  ledger  is  sometimes  incomplete,  and  is  then  fre- 
quently known  as  a  "single-entry"  ledger.    This  means  that  a 
part  of  the  accounts  are  omitted  or  neglected,  so  that  many  en- 
tries are  only  half-posted.    Usually  it  is  the  proprietary  and 
economic  accounts,  or  some  of  them,  which  are  suppressed.    The 
missing  accounts  are  implied  in  the  transactions,  and  when  an 
accountant  examines  such  a  system  he  invariably  constructs  the 
lacking  accounts  as  the  easiest  way  out;  which  rather  indicates 
that  their  omission  did  not  save  any  labor  in  the  end. 

290.  We  must  not  hastily  assume  that  a  ledger  is  incomplete, 
because  the  missing  accounts  do  not  appear  between  the  same 
covers  as  the  others.     It  is  very  probably  the  case  that  in  some 
other  book  or  on  some  sheet  of  paper,  perhaps  in  untechnical 
form,  these  accounts  lie  hidden,  for  they  certainly  exist  implicitly 
if  not  explicitly.     It  is  not  the  insertion  of  the  words,  "Dr.  to" 
and  "  Cr.  by, "  which  makes  the  account;  and  it  is  not  the  bind- 
ing which  limits  the  ledger;  a  ledger  may  be  contained  in  a  dozen 
volumes,  or  a  dozen  ledgers  may  be  contained  in  one  volume;  or 

118 


THE  LEDGER  1 19 

there  may  be  no  binding  at  all,  as  in  the  card  ledger;  or  there 
may  be  a  removable  binding,  as  in  the  loose-leaf  ledger.  The  re- 
lation of  the  accounts  to  each  other,  or  to  some  other  account  to 
which  they  refer,  is  what  determines  the  extent  of  the  ledger. 

291.  The  accounts  which  appear  in  the  balance  sheet  may  be 
group  accounts  (Article  74),  in  which  case  there  are  necessarily 
accounts  of  a  lower  grade  for  each  member  of  a  certain  group; 
or,  in  a  limited  sphere,  without  the  use  of  any  group  accounts, 
each  account  may  enter  directly  into  the  balance  sheet.    The  dif- 
ference between  these  two  modes  of  presentation  is  analogous  to 
the  difference  between  a  town  meeting  where  each  voter  partici- 
pates, and  a  representative  assembly.    The  case  where  the  ac- 
counts are  all  of  one  grade,  may  be  called  a  simple  ledger.    This 
is  frequent  in  small  business  spheres,  but  infrequent  in  the  large 
ones. 

292.  When  there  are  several  grades  of  accounts,  there  are  a 
principal  ledger  and  subordinate  ledgers;  or  as  often  called, 
a  "general"  ledger  and  special  ledgers.    The  former  is  always 
complete,  but  the  latter  may  or  may  not  be  complete,  or  self- 
balancing.    Taking  for  example  a  mortgage  ledger,  such  as 
described  in  Article  74,  all  its  balances  are  on  the  debit  side  and  it 
would  seem  impossible  to  make  a  trial  balance.    It  is  true  that 
the  trial  balance  is  one-sided,  but  the  figures  with  which  this 
should  agree  are  elsewhere;  they  are  the  balance  of  the  group 
account,  Mortgages,  in  the  general  ledger. 

293.  In  order  to  make  the  debits  and  credits  of  the  special 
ledger  equal,  there  is  sometimes  introduced  into  it  what  is  called 
a  "controlling  account,"  which  is  usually  entitled  "General 
Ledger."    It  is  exactly  the  reverse  of  the  Mortgages  account 
hi  the  general  ledger;  what  is  debited  there  is  credited  here  and 
vice  versa.    It  certainly  puts  the  mortgage  ledger  "in  balance," 
if  that  is  considered  desirable. 

294.  It  might  be  urged  that  this  controlling  account  is  il- 
logical, inasmuch  as  increase  of  the  asset,  "mortgages,"  must  in- 


120  THE  PHILOSOPHY  OF  ACCOUNTS 

variably  be  represented  by  a  debit.  But  when  we  look  more 
closely  we  see  that  the  controlling  account  is  proprietary  in  its 
nature;  that  it  represents  one  section  of  the  proprietorship.  It 
might  be  headed  "The  Proprietor  in  account  with  Mortgage 
Debtors."  From  this  point  of  view  it  is  correct  in  theory  and 
its  balance  ought  to  appear,  as  it  does,  to  the  credit. 

295.  The  controlling  account  is  not,  however,  so  much  a 
necessity  as  a  convenience.    It  is  quite  easy  to  dispense  with  it 
and  to  check  the  total  of  the  mortgage  ledger  by  the  balance  of 
the  group  account  in  the  general  ledger.    It  is  not  necessary  that 
a  trial  balance  or  a  balance  sheet  should  always  be  two-sided 
when,  as  in  this  case  and  the  case  cited  in  Article  123,  there  are 
no  negative  or  subtractive  values. 

296.  The  choice  between  incorporating  a  controlling  account 
into  the  subordinate  ledger,  and  considering  it  controlled  by  the 
corresponding  account  in  the  general  ledger,  depends  in  each 
system  upon  the  answer  to  this  question :    Is  it  preferable  to  give 
the  keeper  of  the  subordinate  ledger  a  chance  to  prove  his  own 
accuracy  or  to  have  him  report  his  total  to  the  keeper  of  the 
general  ledger  for  verification?    The  decision  will  depend  on 
personal  and  administrative  considerations  having  no  relation  to 
the  theory  of  accounts;  theoretically  either  procedure  is  correct. 

297.  In  a  system  of  accounts  of  moderate  extent,  a  general 
ledger  and  subordinate  ledgers  may  be  kept  in  the  same  volume 
by  the  use  of  one  of  the  loose-leaf  plans,  thus  avoiding  expense 
and  the  appearance  of  complexity. 

298.  It  is  simply  a  question  of  using  two  colors  of  paper  hi 
providing  the  ledger  sheets.    For  example,  if  the  detailed  ac- 
counts are  in  blue  paper,  let  a  smaller  supply  of  sheets  of  exactly 
the  same  ruling  be  in  buff.    Buff  will  then  indicate  the  general 
ledger  accounts,  that  is,  those  which  are  directly  tributary  to  the 
balance  sheet  either  because  they  represent  units  which  need  no 
subdivision  or  because  they  represent  groups.    The  blue  pages 
represent  the  members  of  groups;  just  before  each  group  of  blue 


THE  LEDGER  I2I 

pages  comes  a  buff  page  which  summarizes  the  figures  of  the  blue 
pages. 

The  little  balance  sheet  of  Jones  &  Smith  (Article  93)  when 
expanded  into  a  ledger  combining  both  general  and  subordinate 
accounts,  might  be  contained  in  the  following  leaves: 

A  buff  leaf  for  a  summary  account  of  Cash. 

Blue  leaves  as  required  for  details  of  cash  transactions;  cash  book. 
A  buff  leaf  for  a  Merchandise  (asset)  account. 

Blue  leaves  constituting  invoice  book. 
A  buff  leaf  for  a  Sales  account. 

Blue  leaves  constituting  sales  book. 
A  buff  leaf  for  a  group  account  for  Bills  Receivable. 

Blue  leaves  constituting  bill  book  for  receivables. 
A  buff  leaf  for  a  group  account  for  Customers. 

Blue  leaves   containing  individual   accounts,   with   customers 

alphabetically  arranged ;  the  customers  ledger. 
A  buff  leaf  for  the  Real  Estate  account  (a  single  piece). 
A  buff  leaf  for  Bills  Payable  account. 

Blue  leaves  constituting  bill  book. 
A  buff  leaf  for  a  group  account  for  Creditors. 

Blue  leaves  of  individual  creditors,  alphabetically  arranged;  "the 

bought  ledger." 

A  buff  leaf  for  account  of  the  Mortgage. 
A  buff  leaf  for  Capital  account. 

Blue  leaves  for  partners'  accounts. 
A  buff  leaf  for  Profit  and  Loss. 

Blue  leaves  for  various  economic  accounts. 

299.  Thus  nearly  all  the  records  of  a  moderate  business  may 
be  contained  in  a  single  binder  and  a  transfer  holder  of  precisely 
the  same  arrangement,  with  the  advantages  of  two  grades  of 
ledger,  general  and  subordinate,  giving  both  comprehensive  and 
minute  information.     Blue  leaves  are  inserted  as  needed,  and  re- 
moved when  filled.    Buff  leaves  may  be  kept  separately  when 
removed,  forming  a  condensed  history  of  the  business. 

300.  If  the  accounts  are  sufficiently  numerous  to  divide  into 
two  or  more  volumes,  the  personal  accounts,  debtor  and  creditor, 


122  THE  PHILOSOPHY  OF  ACCOUNTS 

should  be  in  a  different  volume  from  that  containing  the  accounts 
used  as  posting  mediums  (Chapter  XVI)  as,  in  posting  from 
book  to  book,  both  books  should  be  open.  With  the  ticket  sys- 
tem (Chapter  XVII)  this  precaution  is  unnecessary.  Even  if  a 
single  volume  is  used,  the  leaves  of  posting  mediums  may  be 
temporarily  detached  while  posting. 

301.  Probably  the  most  adaptable  ruling  for  a  combination 
ledger  is  the  three-column  or  balance  ledger  (Figure  7) .     If  a  part 
of  the  leaves  be  delivered  without  ruled  down  lines,  special  rul- 
ings may  be  made  by  hand  to  suit  special  forms  of  account.    This 
would  be  almost  impracticable  with  a  bound  book. 

302.  Postings  to  the  general  ledger  consist  of  the  totals,  usu- 
ally monthly,  of  the  basic  accounts,  such  as  Cash,  Purchases,  and 
Sales.     The  trial  balance  of  the  general  ledger  should  be  first  veri- 
fied, which,  from  the  small  number  of  its  accounts,  is  easily  done. 
Then  each  subordinate  ledger  has  its  own  trial  balance,  verified 
by  its  controlling  account  or  by  the  balance  of  the  corresponding 
general  ledger  account. 

303.  The  ledger  may  be  considered  as  the  book  of  account; 
all  others  are  tributary  to  it  or  derived  from  it,  or  are  sections 
of  it,  kept  apart  for  convenience.     The  modern  tendency  in  ac- 
counting practice  is  that  the  complete  cycle  of  accounts  as  em- 
bodied periodically  in  the  balance  sheet  or  .equation  of  status 
shall  be  the  basis  of  all  records;  that  there  be  no  auxiliary  books 
independent  of  the  ledger  accounts  but  that  each  shall  definitely 
and  regularly  prepare  materials  for  those  accounts. 

304.  Such  of  the  accounts  as  are  confidential  and  not  intended 
to  be  accessible  to  the  office  force  are  sometimes  kept  in  a  private 
ledger.     These  accounts  are  most  frequently,  in  firms,  those  of 
the  partners  and  of  such  investments  as  it  is  unnecessary  to  have 
appear  in  the  current  accounts,  the  scope  of  the  private  ledger 
being  governed  by  circumstances.    If  it  is  intended  to  conceal  the 
amount  of  capital,  it  is  desirable  to  keep  in  the  private  ledger,  be- 
sides the  proprietary  accounts,  some  specific  ones.    For  example, 


THE  LEDGER  12* 

in  the  accounts  of  Jones  &  Smith  (Figure  23)  it  may  be  thought 
best  to  keep  confidential  the  valuation  of  the  real  estate,  the 
amount  of  the  mortgage,  and  the  capital  of  each  partner,  'jhe 
private  ledger  would  then  contain  the  following  accounts: 

RealEstate  ...............................         $10,000.00 

Mortgage  Payable  ..............................  $ 

Jones  ...... 


Balance  of  Private  Ledger  ........................     65,468.43 

$75,468.43      $75,468.43 

This  balance,  $65,468.43,  would  need  to  be  furnished  to  the 
general  ledger  bookkeeper  before  he  could  verify  his  trial  balance, 
which  would  take  this  form: 

Cash  .........................................      $8,589.08 

Merchandise  ...................................       39,249.38 

Bills  Receivable  ................................         7,000.00 

Personal  Debtors  ...............................       24,095.32 

Personal  Creditors  ..............................  $5,465.35 

Bills  Payable  ..................................  8,000.00 

Private  Ledger  .......................  ,  ..........  65,468.43 

$78,933-78    $78,933-78 

305.  Where  the  number  of  accounts  in  the  general  ledger  is 
small  and  the  transactions  are  of  a  few  types,  the  ledger  may  take 
the  tabular  form,  which  is  self-proving  because  the  additions  and 
subtractions  operate  both  transversely  and  vertically. 

306.  The  modes  in  which  the  ledger  may  be  tabulated  are  so 
various  that  it  is  difficult  to  give  a  typical  illustration;  but  Figure 
49  may  be  suggestive. 

307.  Taking  the  same  list  of  accounts  shown  in  Article  304,  a 
ledger  is  to  be  constructed  which  shall  show  each  month  all  the 
transactions  of  the  month,  with  the  results  at  the  close.    Entries 
bearing  the  same  letter  form  a  complete  transaction,  as  will  be 
seen  by  collating  them.    The  economic  accounts  are  kept  in  a 
separate  table  and  are  not  balanced  but  aggregated  from  month 


124 


THE  PHILOSOPHY  OF  ACCOUNTS 


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THE  LEDGER  125 

to  month.    Their  resultant,  however,  is  carried  into  the  table  of 

the  special  accounts.    The  private  ledger  plan  is  also  illustrated. 

For  any  incidental  transaction  of  a  type  not  comprised  hi  the 

key,  a  letter  is  assigned  and  the  explanation  given  in  manuscript. 


CHAPTER  XIX 
PRECAUTIONS  AGAINST  ERROR 

CAUSES  OF  ERROR — COMPARISON — CHECKING  OFF — CALLING  OFF — 
RECONSTRUCTIVE  METHODS — CHECK  LEDGERS — THE  BANK  BALANCE 
LEDGER — REVERSE  POSTING — APPLICATION  TO  SAVINGS  BANKS — 
SECTIONIZING — THE  COUPON  METHOD — PROVING  THE  BALANCE 
— DOUBLE  BALANCE  METHOD — BALANCE  POSTING,  OR  PROVING  BY 
DIFFERENCE 

308.  Experience  shows  that  the  intellect,  even  in  so  mechan- 
ical a  process  as  posting,  cannot  be  absolutely  relied  on  to  be  free 
from  error.     Error  or  omission  will  occur  in  a  small  percentage 
of  the  work  and  is  usually  caused  by  inattention.     This  is  either 
temperamental,  or  else  accidental,  resulting  from  interruption, 
disturbance,  fatigue  from  too  long-continued  work  or  illness. 
The  errors  thus  caused  would  be  found  by  the  next  trial  balance; 
but  in  the  meantime  the  inaccuracy  of  the  account  might  bring 
about  a  loss.     To  avoid  such  loss  and  also  to  minimize  the  labor 
of  the  trial  balance,  various  plans  are  in  use  for  a  daily  check 
on  the  current  work. 

309.  This  check  will  be  the  more  efficacious  according  as  it  is 
independent  of,  and  different  from,  the  original  work.    If  we  take 
exactly  the  same  road  as  before  we  are  most  likely  to  strike  the 
same  pitfalls.     The  same  aberration  of  the  intellect  which  caused 
an  error  will  be  apt  to  produce  the  like  again. 

310.  Different  minds  find  different  means  the  best  in  this 
respect,  and  each  should  seek  the  check  which  he  h'mself  finds 
efficacious.    The  quantity  of  work  to  be  gone  over  is  also  a 
determinant,  as  a  long-continued  series  of  postings  has  a  benumb- 
ing effect  so  that  a  very  simple  test  may  fail,  from  that  proneness 
to  assent  which  everyone  feels  in  greater  or  less  degree. 

126 


PRECAUTIONS  AGAINST  ERROR  127 

311.  Misposting  will  hardly  ever  pass  unnoticed  if  before 
leaving  each  posting,  by  a  conscious  effort  of  will,  one  wakes 
himself  up  to  the  real  meaning  of  what  he  is  recording  and, 
shutting  out  all  other  thoughts,  asks  himself,  "Is  this  true?"  This 
habit  is  a  valuable  one  to  form. 

312.  The  simplest  check  is  to  go  over  all  the  postings  a  second 
time,  comparing  with  the  original.     To  show,  hi  case  of  interrup- 
tion, how  far  the  process  has  gone,  a  check  mark  (V)  is  placed 
opposite  each  item  after  it  is  found  correct.    These  ticks  should 
not  be  too  large,  but  contained  within  the  ruled  lines;  an  un- 
ticked  line  is  a  danger  signal  which  may  be  obscured  by  a  large 
tick.     If  an  item  has  been  posted  to  the  wrong  account,  the  true 
account  will  be  blank;  the  posting  must  be  supplied  and  ticked. 
If  the  item  had  been  altogether  omitted,  the  matter  is  at  an  end; 
if  it  had  been  posted  in  a  wrong  place,  there  is  somewhere  in  the 
books  a  line  without  a  tick,  which  when  observed  must  be  in- 
stantly investigated. 

313.  If  another  person,  not  the  original  poster,  conducts  the 
comparison  and  ticking  there  is  some  additional  security,  for  the 
new  man  comes  with  a  fresh  eye  to  the  work. 

314.  When  assistance  is  available,  it  is  quite  usual  to  work 
in  a  team  of  two,  in  the  process  called  "calling  back,"  "calling 
off,"  or  "calling  over."    One  person  reads  off  the  name  or  num- 
ber of  an  account  and  the  other,  turning  to  the  proper  page,  re- 
sponds with  the  figures.     I  am  aware  that  this  method  is  used  by 
many  public  accountants  in  auditing,  probably  to  save  time,  the 
bound-book  system  not  allowing  of  any  other  division  of  labor. 
Yet  I  believe  that  two  persons  working  separately  will  accom- 
plish more,  and  more  surely,  than  in  the  "calHng-off"  process. 
The  ear  is  less  reliable  than  the  eye  and  more  easily  deceived.   The 
tasks  of  the  two  men  are  not  precisely  equal:  the  one  being  com- 
paratively inactive,  and  therefore  a  large  part  of  his  time  being 
wasted,  while  his  mind  becomes  torpid  through  inaction  and 
when,  after  hundreds  of  correct  postings,  an  incorrect  one  is  called 


128  THE  PHILOSOPHY  OF  ACCOUNTS 

off  he  fails  to  observe  it.  If  it  is  possible  to  subdivide  the  work 
so  that  each  can  check  a  separate  part  by  eye,  I  think  it  will  be 
found  that  the  two  will  accomplish  more  and  better,  separately, 
than  together. 

315.  Quite  a  different  class  of  check  systems  is  composed  of 
those  where  we  reconstruct  the  accounts  anew  from  the  original 
sources,  or  by  the  converse  process  reconstruct  the  posting 
sources  anew  from  the  accounts.    The  resulting  lists  are  com- 
pared in  total  with  their  prototypes,  hence  the  final  test  embraces 
but  few  figures  and  the  chance  of  " assenting"  to  an  error  is 
greatly  lessened;  while  the  relation  of  the  figures  is  altered  into 
new  combinations. 

316.  A  check  ledger  or  balance  ledger  is  in  effect  a  duplicate 
ledger  kept  in  some  simpler  and  briefer,  perhaps  rougher,  way, 
because  it  is  not  needed  for  precise  information  but  for  the  pur- 
pose of  a  check  on  the  ordinary  ledger.     For  this  reason,  it  may 
be  kept  in  pencil,  dates  may  be  omitted  and  all  descriptive  mat- 
ter, a  large  number  of  accounts  may  appear  at  one  opening,  or  it 
may  carry  balances  only  and  not  transactions.    This  may  be  a 
very  good  plan  in  a  mercantile  business  where  balances  are  not 
very  often  called  for  except  monthly.     It  serves  mainly  as  a  cor- 
rective of  the  monthly  trial  balance,  all  final  balances  being 
compared  before  totaling. 

317.  In  a  banking  business  of  any  kind,  the  correct  keeping  of 
depositors'  accounts  is  a  matter  of  the  greatest  importance.    The 
balance  should  be  at  all  times  ascertainable  and  reliable  to  avoid 
the  risk  of  overpayment.    The  balance  ledger  was  therefore  intro- 
duced as  a  check  on  the  ordinary  ledger.     Its  peculiarity  is  that 
each  account  runs  horizontally,  occupying  a  line  across  the  page. 
The  first  column  in  the  page  contains  the  initial  balances,  usually 
in  red,  of  thirty  or  forty  accounts,  a  name  on  each  line.    When 
totaled  and  aggregated  this  column  is  a  trial  balance  of  the 
deposit  system.    The  next  column  contains  all  the  credits  for  the 
day  on  each  account,  a  third  column  all  the  debits,  and  the  fourth 


PRECAUTIONS  AGAINST  ERROR 


129 


the  resulting  balances  of  the  next  day.     It  is  evident  that  the 
totals  may  be  proved,  forming  the  equation: 

Old  Balance  +  Credits  -  Debits  =  New  Balance 

FIGURE  50 
THE  BANK  BALANCE  LEDGER 


Names 

Balances 
Jan.  15 

Credits 

Debits 

Balances 
Jan.  1  6 

Credits 

Debits 

AB 
B  B 
CB 

I734-I6 
2000.00 
2217.65 

223.19 
300.00 
500.00 

100.00 
463-17 

I857-35 
1836.83 
2717.65 

Totals 

595i.8i 

1023.19 

563-17 

6411.83 

318.  This  is  the  general  principle  on  which  it  is  worked,  omit- 
ting a  number  of  details  and  variations  in  practice,  such  as  pro- 
viding for  debits  in  detail,  writing  the  daily  credits  in  the  same 
column  as  the  balances  but  in  different  ink,  placing  inactive 
accounts  by  themselves,  providing  for  overdrafts  (debit  bal- 
ances), making  part  of  the  pages  narrower  so  that  the  names 
do  not  have  to  be  rewritten. 

319.  The  convenience  and  advantages  of  the  balance  ledger 
are  so  great  that  in  most  banks  it  has  become  the  principal  ledger, 
and  the  "vertical"  accounts  have  been  disused  altogether.    The 
check  on  it  is  the  monthly  statement  which  is  written  up  day  by 
day  with  a  facsimile  copy,  and  which  gives  debits  and  credits  in 
detail.    In  this  point  of  view  the  balance  ledger  might  properly 
have  been  treated  in  a  later  chapter. 

320.  Directly  contrary  to  the  methods  which  duplicate  the 
ledger  are  those  processes  which  are  known  under  the  title  of 
"reverse  posting."    I  think  I  was  the  originator  of  this  name, 
at  least,  though  the  process  itself  was  doubtless  thought  out  by 
others  before  me. 


130 


THE  PHILOSOPHY  OF  ACCOUNTS 


321.  The  essential  feature  of  reverse  posting  is  to  reconstruct 
from  the  ledger  itself  the  sources  of  the  ledger,  or  if  the  posting 
is  from  tickets  to  reconstruct  a  few  of  the  accounts  from  the 
many.    These  few  which  are  to  be  rebuilt  are  those  which  enter 
into  the  majority  of  all  the  regular  transactions — those  which 
would  be  selected  for  the  basis  of  posting  mediums  if  ticket 
posting  were  not  employed. 

322.  Supposing  that  the  debits  were  normally  for  Cash,  Sales, 
and  Interest  and  that  the  credits  were  usually  for  Cash,  Pur- 
chases, Discounts,  and  Expense,  a  small  sheet  is  ruled  with  a 
column  for  each  of  these  basic  accounts  and  an  extra  one  for 
Sundries  or  miscellaneous. 


FIGURE  51 


Dr. 


Cash 

Sales 

[nteresl 

;' 

c 

>undrie 

s 

17 

96 
98 

REVERSE  POSTING  SHEET 19. .. 


Cr. 


Cash 

Purchases 

Discount 

Expense 

Sundries 

323.  These  forms  may  be  on  a  single  page,  or  on  opposite 
pages  of  the  same  leaf,  or  on  separate  leaves. 

324.  The  columns  are  to  be  filled  strictly  by  copying  what  is 
found  in  the  account  and  the  proof  is  made  by  adding  each 


PRECAUTIONS  AGAINST  ERROR  131 

column.  Each  column  will  correspond  in  its  total  to  the  total  of 
the  transactions  of  one  of  the  posting  mediums  or  one  of  the  basic 
accounts.  The  two  Sundries  columns  will  be  equal  in  aggregate. 

325.  It  might  be  recommended  (though  I  have  not  seen  this 
hi  practice)  to  make  the  totals  continuous  during  the  month, 
carrying  forward  the  totals  from  the  bottom  of  one  sheet  to  the 
top  of  the  next.    The  totals  of  the  posting  medium  added  in 
pencil  to  the  same  point  would  always  be  proved.    The  same 
result  might  be  attained  by  recapitulating  the  daily  totals  of 
columns  on  a  monthly  sheet,  and  aggregating  these  day  by  day. 

326.  An  important  question  in  the  use  of  reverse  posting  is: 
When  shall  the  sheet  be  filled?  at  the  time  of  posting,  or  as  a 
distinct  processs?    It  is  easier  to  insert  the  posting  in  the  reverse 
sheet  while  the  page  lies  open  before  you.    Many  do  this,  keeping 
the  sheet  alongside  and  as  soon  as  each  entry  is  made  in  the 
ledger  transcribing  it  on  the  sheet.    The  entire  efficacy  of  the 
reverse  posting  process  depends  on  the  contents  of  the  sheet  being 
a  transcript  from  the  ledger,  right  or  wrong,  and  from  nowhere 
else.    I  should  myself  be  afraid  that,  with  the  memory  and  sight 
of  the  original  so  freshly  before  me,  I  might  revert  to  it  and  write 
it  instead  of  the  erroneous  ledger  sum  which  I  ought  to  copy,  and 
which  I  should  thus  fail  to  detect. 

327.  The  alternative  method  is,  first,  to  go  through  with  all 
the  posting;  when  the  last  entry  is  posted,  and  not  before,  to  take 
up  the  reverse  sheet  and  fill  it  from  the  ledger.    This  again  has 
two  alternatives: 

1 .  To  examine  every  account  in  the  ledger  for  transactions  of 

this  date. 

2.  To  leave,  on  posting,  some  indication  or  trail  by  which  the 

accounts  affected  may  alone  be  considered  and  all  those 
which  are  untouched  may  be  disregarded. 

328.  Plan  (i)  would  be  a  very  thorough  one  where  the  ac- 
counts are  few  but  active,  so  that  the  majority  of  them  had  some 


132  THE  PHILOSOPHY  OF  ACCOUNTS 

change  each  day.    It  would  eliminate  some  classes  of  errors  such 
as  posting  the  same  item  in  two  different  places. 

329.  Plan  (2)  may  be  carried  out  in  either  of  several  different 
ways.     One  is  to  use  strips  of  paper  at  the  time  of  posting,  in- 
serting them  so  that  they  project  above  the  page  where  the  post- 
ing occurs.    Then  in  the  reverse  process  these  are  used  as 
markers,  and  only  those  pages  are  referred  to  where  a  marker  is 
found.    There  is  a  modification  consisting  in  a  variation  in  the 
color  of  the  strip,  using,  for  example,  red  strips  for  debits  and 
black  strips  for  credits.    I  think  this  dangerous,  because  it  sug- 
gests too  much.     Perhaps  a  debit  has  been  erroneously  posted  to 
the  credit  side,  but  the  red  strip  suggests  a  debit  and  the  reverse 
posting  is  made  to  the  debit  sheet;  then  the  error  is  concealed  in- 
stead of  being  revealed.    I  should  decidedly  prefer  a  strip  which 
would  merely  indicate  the  page  and  leave  the  reverse  poster  to  do 
his  work  without  suggestion.    There  is  an  objection  to  this  slip 
plan,  that  a  posting  to  the  wrong  page  might  be  undiscovered. 
In  the  card  ledger  no  strips  need  be  used,  but  each  card  to  which 
posting  has  been  made  left  a  little  higher  than  the  others  or  a 
little  to  one  side. 

330.  Another  way  of  "blazing  the  trail"  is  to  prepare  the 
reverse  posting  sheet  by  writing  in  each  column  in  advance 
the  numbers  of  the  pages  affected,  taking  these  numbers  from  the 
original  sources.     In  Figure  52  in  the  Cash  column  I  have  indi- 
cated the  place  of  these  numbers.     This  would  discover  such 
an  error  as  alluded  to  in  the  previous  paragraph  unless  the  original 
source  were  improperly  folioed. 

331.  As  an  extension  of  the  method  in  Article  330,  the  names 
as  well  as  the  folios  may  be  included  in  the  proof  of  the  posting. 
It  is  recommended  that  only  a  few  letters  of  the  name  be  written 
in  the  preparatory  work  and  that,  at  the  time  of  the  reverse 
posting,  the  remaining  letters  be  filled  in.     This  compels  the 
attention  to  be  fixed  upon  the  name,  which  might  otherwise  be 
overlooked. 


.PRECAUTIONS  AGAINST  ERROR 


133 


•8 

§ 
c/> 


W 


rt 

o 


O 


134  THE  PHILOSOPHY  OF  ACCOUNTS 

332.  When  tickets  are  used  for  posting,  or  for  making  up 
the  posting  mediums,  a  most  advantageous  way  of  preparing  the 
sheets  is  to  assort  all  the  tickets  in  a  single  series,  alphabetically 
or  numerically,  so  as  to  bring  them  into  the  same  order  as  the 
pages  of  the  ledger  and  to  avoid  the  waste  of  time  through  turn- 
ing back  and  forward.    To  give  the  fullest  effect  to  the  verifica- 
tion the  number  or  name  of  the  account  should  be  in  the  middle 
of  the  sheet  and  the  columns  to  the  left  and  right. 

333.  The  highest  degree  of  certitude  is  reached  when  the  veri- 
fication or  reverse  posting  is  done  not  by  the  original  poster,  but 
by  another,  who  has  no  prepossessions  as  to  the  transaction.    He 
turns  to  the  account  and  transcribes  literally  what  is  found  there. 
He  is  compelled  to  look  at  the  name,  the  amount,  which  side 
it  is  on,  and  what  its  source;  none  of  these  facts  are  suggested 
to  him.     If,  then,  after  he  has  reversed  every  posting  the  col- 
umns of  his  sheet  exactly  agree  in  total  with  the  total  given 
elsewhere,  the  evidence  is  very  strong  that  all  the  posting  is 
correct. 

334.  In  a  savings  bank,  where  the  accounts  are  very  numer- 
ous and  the  current  entries  are  all  cash,  this  method  with  various 
modifications  is  used  extensively  and  effectually.    In  the  larger 
institutions  of  the  kind  it  is  further  found  advisable  to  "section- 
ize"  the  ledgers;  that  is,  to  divide  the  whole  mass  of  accounts 
into  large  blocks,  say  of  2,000  or  3,000  accounts  bearing  con- 
secutive numbers.     This  feature  is  carried  into  the  daily  work 
by  making  a  break  in  the  list  at  the  end  of  each  section  or  block. 
This  presupposes  that  each  teller  has  made  a  list,  either  by 
mechanism  or  with  a  pen,  of  the  tickets,  the  total  agreeing  with 
the  state  of  the  cash  and  forming  the  standard  to  which  the 
reverse  posting  must  conform,  if  correct. 

335.  An  account  must  be  kept  with  each  of  the  blocks  of 
accounts  constituting  a  section.    This  makes  an  intermediate  sys- 
tem between  the  general  ledger  account  of  Depositors,  and  the 
individual  account  of  each  depositor.    This  will  give  information 


PRECAUTIONS  AGAINST  ERROR  135 

at  the  time  of  the  trial  balance  as  to  how  much  the  balances  of 
each  section  ought  to  produce.  If  some  of  them  are  found  cor- 
rect, the  attention  is  concentrated  upon  those  which  show  differ- 
ences. This  principle  of  sectionizing  is  of  great  value  in  all  cases 
where  there  is  a  large  number  of  accounts  to  be  handled — so  large 
that  the  search  for  an  error  is  very  laborious,  like  the  hunting  for 
needles  in  a  haystack.  If  we  divide  the  haystack  into  a  number 
of  smaller  stacks,  in  many  of  which  it  is  apparent  that  there  is  no 
needle,  the  search  is  much  facilitated. 

336.  Returning  to  the  reverse  sheet  for  testing  transactions  in 
savings  banks,  we  have  assumed  that  a  consecutive  list  of  trans- 
actions has  been  prepared  at  the  teller's  desk,  by  which  he  proves 
his  cash  and  to  which  the  bookkeeper's  sheet  must  finally  con- 
form, the  latter  being  numerically  arranged  and  broken  into  sec- 
tions. These  two  lists  are  sometimes  combined  in  what  is  known 
as  the  "coupon  "  method.  This  consists  in  keeping  at  the  teller's 
desk  a  set  of  sheets,  one  for  each  section  and  entering  on  these, 
preferably  from  the  pass  book,  each  transaction  which  has  been 
made.  The  transactions  thus  assort  themselves  instead  of  being 
assorted  afterwards.  The  sheets  are  in  a  peculiar  form,  there 
being  two  money  columns  with  a  perforation  between,  with 
spaces  for  number  and  name. 

The  first  of  the  money  columns  is  left  blank  by  the  teller,  who 
uses  only  the  outer  one.  He  balances  his  cash  by  this  outer 
column,  aggregating  all  the  sheets,  tears  off  the  strip  or  coupon 
and  retains  it.  The  remainder  goes  to  the  bookkeeping  depart- 
ment as  a  reverse  sheet.  It  is  not  quite  so  convenient  for  that 
purpose  as  a  consecutive  list  in  numeric  order,  for  the  accounts  in  a 
heavy  section  have  to  be  picked  out  of  a  mass,  or  else  there  is 
much  turning  of  leaves.  On  the  other  hand,  if  the  section  fails  to 
prove,  it  is  very  easy  to  discover  the  error  by  laying  the  coupon 
in  the  place  where  it  originally  was  and  comparing  the  amounts  as 
they  stand  side  by  side.  There  is  no  exact  chronological  list  and 
no  exact  numeric  list. 


I36 


THE  PHILOSOPHY  OF  ACCOUNTS 


FIGURE  53 


PROVING  SHEET                                        COUPON 

12  Apr.  1907         Section  23         460,001  —  465,000                    23 

No. 

Name 

Deposits                 12  Apr.  07 

462,749 

Smith 

100 

460,979 

Jones 

25 

463,652 

Robinson 

63 

464,998 

Murphy 

17 

460,723 

Becker 

3 

&c. 

337.  Where  the  "three-column"  ledger  (debits,  credits,  and 
balance)  is  used,  it  is  very  important  to  have  the  Balance  column 
verified;  more  important,  in  fact,  than  the  debit  and  credit 
columns,  for  the  Balance  column  is  relied  upon  as  a  guide  for 
instant  payments.  There  are  two  ways  of  insuring  the  accuracy 
of  the  balances,  which  may  be  termed  the  "double  balance"  and 
the  "balance  posting"  methods.  The  former  requires  the  addi- 
tion to  the  sheets  (Figure  52  or  53)  of  two  columns  for  Old  Bal- 
ance and  New  Balance.  Figure  53  would  then  be  arranged  as 
follows : 


No. 
462,749 


Name 
Smith 


Old 

Balance 
2769.13 


New 
Balance 
2869.13 


Deposits  j 
100.00    I 


The  teller  has  inserted  only 

462,749  Smi 

and  the  testing  clerk  has  added 

th          2769.13         2869.13 


Deposits 
100.00 


100.00 


100.00 


PRECAUTIONS  AGAINST  ERROR  137 

all  copied  from  the  ledger.  Thus  an  error  in  balancing  would  be 
as  certain  of  detection  as  an  error  in  posting;  for  the  difference 
between  the  totals  of  the  Old  Balance  column  and  of  the  New  Bal- 
ance column  must  be  equal  to  the  totals  of  the  deposits  (or  drafts). 
''Balance  posting"  equally  insures  correctness  of  balances 
with  much  less  labor.  Its  essential  feature  is  working  backward 
from  the  balance  (which  is  first  to  be  entered)  to  the  transaction 
which  is  inferred  from  the  increase  or  decrease  exhibited  in  the 
Balance  column.  No  change  is  made  in  the  sheets,  whether  of 
Figure  52  or  53,  but  the  variation  is  in  the  order  of  posting  the 
ledger.  Thus  if  the  ledger  account  of  John  Smith  stands  as 
follows : 

462,749 

JOHN  SMITH 

Date  Dr.  Cr.  Balance 

1907         Brought  forward  2769.13 

and  it  is  desired  to  post  a  deposit  of  $100,  the  posting  and  proving 
are  done  in  the  following  stages : 

First  Operation.  Taking  the  deposit  ticket,  the  bookkeeper 
writes  the  date  and  then,  instead  of  entering  the  $100  to  the 
credit,  he  enters  in  the  Balance  column,  2,869.13,  and  nothing 
else.  Continuing  this  process  until  all  the  accounts  having  trans- 
actions have  been  rebalanced,  he  turns  over  the  tickets  to  the 
head  bookkeeper.  Smith's  account  then  reads: 

1907         Brought  forward  2769.13 

April  12  2869.13 

Second  Operation.  Another  bookkeeper  having  no  intima- 
tion of  the  transaction  infers  from  the  increased  balance  that  it 
was  a  deposit  of  $100,  and  inserts  that  sum  in  the  credit  column 
of  the  ledger: 

1907        Brought  forward  2769.13 

April  12  loo.oo  2869.13 


138  THE  PHILOSOPHY  OF  ACCOUNTS 

This  is  exactly  the  same  entry  as  would  appear  if  the  entry  had 
been  made  first  and  the  rebalancing  done  afterward;  but  there 
is  this  important  difference,  that  an  error  in  striking  the  balance 
would  cause  the  $100  to  vary  from  the  original  ticket  and  lead 
to  detection. 

Third  Operation.  The  $100,  which,  if  the  balancing  has  been 
correctly  done,  represents  the  correct  transaction,  is  copied  into 
the  sheet  opposite  the  proper  number  and  name,  and  the  sheets 
delivered  to  the  head  bookkeeper. 

Fourth  Operation.  The  tickets  and  the  sheets,  reaching  the 
head  bookkeeper  by  different  channels,  are  compared  by  him. 
If  he  finds  that  they  agree  in  all  respects,  he  is  assured  not  only 
that  the  debits  and  credits  are  correct  and  on  the  right  sides  but, 
what  is  still  more  important,  the  balances  are  reliable.  He  may, 
however,  have  overlooked  some  discrepancy,  or  some  transac- 
tion may  have  been  omitted  altogether;  hence  a  still  further 
proof  is  made. 

Fifth  Operation.  The  columns  of  debits  and  credits  are  added 
up  by  sheets  and  sections  and  aggregated;  and  if  the  totals  agree 
exactly  with  those  of  the  actual  cash  received  and  paid,  there  is 
the  highest  degree  of  assurance  that  all  the  work,  including  the 
balancing,  has  been  correctly  done.  Experience  shows  that  it  is 
almost  impossible  for  an  error  to  evade  the  process. 

338.  There  is  another  class  of  precautionary  methods,  which 
consist  in  transcribing,  not  the  figures  themselves,  but  a  so-called 
"check  number"  derived  from  the  digits  of  the  amount  of  the 
transaction  through  the  properties  of  9  or  some  other  number. 
I  shall  not  discuss  these,  as  they  are  somewhat  outside  of  the 
province  of  accountancy. 


CHAPTER  XX 
THE  DETECTION  OF  ERRORS 

CLASSIFICATION  OF  ERRORS — SELECTION  OF  PROCEDURE — TRANSPOSI- 
TION INDICATED  BY  g's — CORRECTION  OF  ERROR — NARROWING  THE 
FIELD — TABULATION  OF  LEDGER 

339.  The  trial  balance  has  been  drawn  off  and  added,  and 
the  totals  of  the  debit  and  of  the  credit  sides  do  not  agree  with 
each  other.    There  is  error  somewhere;  we  ascertain  the  exact 
amount  of  the  discrepancy  (commonly  called  the  "difference") 
and  the  pressing  need  is  to  find  and  remove  its  causes.    It  may  be 
caused : 

1.  By  a  single  error. 

2.  By  several  errors  on  the  same  side. 

3.  By  an  error  or  errors  on  each  side. 

The  difference  is  the  resultant  of  all  these  errors.    They  may  be 
classed  as: 

4.  Omission  to  post. 

5.  Duplicate  posting  of  the  same  item. 

6.  Posting  on  the  wrong  side. 

7.  Substitution  of  one  figure  for  another. 

8.  Transposition  of  figures. 

9.  Incorrect  combinations  of  figures  by  addition  or  sub- 

traction. 

340.  The  selection  of  a  procedure  for  exactly  locating  the 
difference  will  depend  somewhat  on  the  extent  and  multiplicity 
of  the  transactions,  on  the  correlation  of  the  accounts,  and  on  the 
habitual  accuracy  of  the  poster.    If  he  is  known  to  be  very  accu- 
rate, so  much  so  that  his  trial  balance  seldom  shows  a  difference, 
the  probability  is  strongly  in  favor  of  there  being  only  one  error. 

139 


140  THE  PHILOSOPHY  OF  ACCOUNTS 

On  this  hypothesis,  we  should  endeavor  to  find  an  item  of  exactly 
the  same  amount  as  the  difference,  and  ascertain  if  (4)  or  (5) 
has  not  occurred;  or  an  item  of  half  the  amount  of  the  difference, 
for  (6),  being  a  double  error,  doubles  the  difference  by  increasing 
the  one  side  and  diminishing  the  other.  If  the  difference  is  one 
expressed  by  a  single  digit,  it  is  very  likely  caused  by  (7)  or  (9). 
If  (8)  has  occurred  and  is  the  only  source  of  error,  the  difference 
will  always  be  exactly  divisible  by  9.  According  to  a  well-known 
arithmetical  principle,  the  divisibility  of  a  number  by  9  is  easily 
ascertained  without  actually  performing  the  division;  simply  add- 
ing the  digits  themselves  as  if  they  were  all  in  the  units  column. 
27  is  divisible  by  9,  and  2  +  7  =  9.  T3>579  *s  not  exactly  divis- 
ible by  9,  for  i  +  3  +  5  +  7  +  9  =  25,  and  2  +  5  =  7.  Seven 
will  be  the  remainder  after  dividing  13,579  by  9,  hence  a  differ- 
ence of  $135.79  could  not  be  caused  by  transposition  alone. 
179,865,342  is  divisible  by  9,  because: 

i  +7+9+8+6  +  5+3+4  +  2  =45  and  4  +  5=9 

There  is  nothing  very  wonderful  in  this  peculiarity  of  9,  for  it 
simply  means  that  9  is  the  difference  between  a  unit  of  any 
denomination  and  a  unit  of  the  next  denomination.  If  we  trans- 
pose 43  into  34,  we  have  substituted: 


4  units  for  4  tens,  difference  4  nines 
3  tens  for  3  units,  difference  3  nines 


Every  possible  shifting  of  places  results  in  some  number  of  nines. 

But  there  are  many  other  ways  of  producing  a  nine  difference 
than  by  transposition  and  the  time  expended  in  searching  for 
transposible  figures  is  frequently  wasted. 

A  more  thorough  and  systematic  method  is  needed,  and  to 
adopt  some  such  plan  will  generally  prove  a  saving  of  time. 

341.  The  methods  for  conducting  a  search  are  analogous  to 
those  described  in  Chapter  XIX  for  the  prevention  of  error.  The 
postings  may  be  all  gone  over  again  and  checked;  if  already 
checked  in  advance,  a  distinctive  mark  should  be  adopted  for  the 


THE  DETECTION  OF  ERRORS  14! 

second  operation.  "  Calling-off  "  may  be  resorted  to  without  the 
dangers,  referred  to  in  Article  3 14,  for  the  fact  that  there  is  actually 
something  to  find  will  keep  the  senses  more  alert  than  where  the 
operation  may  prove  useless.  Then,  to  guard  against  (9)  all 
additions  and  carryings  forward  must  be  re-examined  and  finally 
the  making-up  of  the  trial  balance  itself,  for  there  have  been 
cases  where  the  ledger  was  absolutely  correct  but  was  mis- 
represented in  the  trial  balance. 

342.  The  foregoing  procedure  ought  to  discover  errors  which 
when  corrected  will  bring  the  ledger  into  equilibrium.     Each 
error  when  found  should  be  rectified  thoroughly,  and  it  is  very 
important  that  this  should  be  done  in  proper  order.    Do  not  make 
the  alteration  in  the  trial  balance  first  and  the  ledger  afterwards, 
for  there  is  then  a  possibility  of  omitting  to  change  the  ledger, 
and  a  more  dangerous  state  of  things  exists:  a  ledger  which  is 
erroneous  but  apparently  has  the  guaranty  of  a  trial  balance. 
Make  a  rigid  rule  to  correct  errors  first  at  the  source,  and  follow 
up  the  correction  in  the  natural  order  till  it  reaches  the  total  of 
the  trial  balance.    It  is  an  unwise  plan,  when  a  part  of  the  differ- 
ence is  found,  to  subtract  it  from  or  add  it  to  the  original  differ- 
ence.   The  better  way  is  to  eliminate  the  old  difference  altogether 
and  ascertain  afresh  the  amount  of  discrepancy.    Remember  that 
the  sole  object  of  the  search  is  to  rectify  the  accounts,  not  to 
rectify  the  trial  balance. 

343.  But  it  sometimes  happens  that  after  all  this  labor  of 
going  over  the  work  a  second  time,  a  discrepancy  still  appears. 
The  error  is  perhaps  right  on  the  surface,  yet  it  is  unnoticed  the 
second  time  as  it  was  the  first.    This  is  very  discouraging  and 
there  is  no  reason  to  believe  that  a  second  or  a  third  performance 
of  the  same  process  will  be  any  more  successful.    The  defect  of 
the  method  is  that  it  does  not  narrow  down  the  field  and  gradually 
"corner"  the  error  in  some  limited  area.    A  method  which  does 
this  must  ultimately  succeed,  for  the  area  diminishes  until  it 
embraces  only  the  erroneous  entry. 


142  THE  PHILOSOPHY  OF  ACCOUNTS 

344.  A  first  narrowing  of  the  field  may  take  place  by  ascer- 
taining whether  the  debit  or  the  credit  side  is  faulty.     If  the  trial 
balance  is  composed  of   totals,  and  not  merely  of  balances 
(Article  220),  we  can  ascertain  what  the  grand  total  of  each  side 
ought  to  be,  by  summing  the  original  sources.    Take  first  the 
simple  case  of  full  journalization,  where  every  entry  in  the  ledger 
must  have  proceeded  from  the  journal;  where  the  contents  of  the 
ledger  are  merely  the  contents  of  the  journal  rearranged.    The 
total  of  the  journal  is  a  standard  for  the  total  of  the  ledger,  and 
either  side  which  varies  from  that  standard  is  erroneous. 

Thus,  if  we  have  the  following  results: 

Total  of  trial  balance $117,648.29     $117,395.74 

Total  of  journal 117,648.29       117,648.29 

it  would  be  waste  of  time  to  look  for  error  in  the  debit  side :  it 
must  be  in  the  credit.  Of  course,  in  practice,  allowances  may 
have  to  be  made  for  accounts  ruled  off,  etc.,  but  this  can  easily  be 
done.  It  may  be  that  both  sides  are  erroneous  and  then  we  have 
not  gained  very  much.  If  one  side  is  excessive  and  the  other 
deficient,  there  is  strong  indication  of  posting  to  the  wrong  side, 
especially  if  the  redundance  and  the  shortage  are  equal  in  amount. 

345.  The  same  principles  may  be  applied  where  the  place  of 
the  journal  has  been  taken  by  other  posting  mediums  (Chapter 
XVI).    The  amounts  contributed  by  each  posting  medium  to 
each  side  are  set  down  and  their  totals  determined  the  standard 
to  which  the  ledger,  represented  in  the  trial  balance,  ought  to 
conform.     Thus: 

Debits  from  Cash  Book $ 

from  Sales  Book 

total  of  Invoice  Book 

from  Journal 

Previous  balances 


less  accounts  closed . 
Total.. 


THE  DETECTION  OF  ERRORS  143 


Credits  from  Cash  Book . . . 
from  Invoice  Book, 
total  of  Sales  Book . 

from  Journal 

Previous  balances.  . 


less  accounts  closed . . 
Total. . 


346.  The  surest  way  for  completely  tracking  all  errors  by  an  ex- 
haustive process  is  to  tabulate  the  ledger.   This  process  is  called  by 
some  writers  "analyzing,"  but  it  seems  to  me  that  "tabulation" 
more  exactly  describes  it.    It  consists  in  reducing  the  entries  in 
each  account  to  the  form  of  a  horizontal  line  very  much,  in  prin- 
ciple, like  the  bank  balance  ledger  described  in  Article  317,  or  the 
general  ledger  in  Article  307.     In  the  tabulated  ledger,  however, 
as  both  debit  and  credit  balances  are  comprised,  it  is  necessary  to 
allow  more  columns.     It  is  governed  by  this  equation: 

Old  debit  balance  +  debit  entries  +  new  credit  balance 
=  old  credit  balance  +  credit  entries  +  new  debit  balances 

The  left-hand  side  of  this  equation  is  represented  by  the  left- 
hand  page  of  a  book  ruled  in  a  number  of  columns,  and  the  right- 
hand  side  by  its  right-hand  page.  The  debit  entries  occupy  a 
number  of  columns  according  to  their  sources  in  the  various 
posting  mediums  or  the  basic  accounts,  exactly  as  in  the  reverse 
posting  sheet  (Article  331,  Figure  52),  and  the  credit  entries  are 
classified  in  the  same  way. 

347.  The  arrangement  of  the  tabulation  might  be  as  in 
Figure  54,  it  being  supposed  that  the  debit  postings  are  all  from  a 
cash  book,  a  sales  book,  and  a  journal,  and  the  credits  from  cash 
book,  invoice  book,  and  journal. 

348.  Having  provided  these  columns,  it  is  obvious  that  the 
contents  of  any  account  may  be  "strung  out"  across  the  page 
and  that,  including  the  initial  and  final  balances,  exactly  the  same 
total  will  appear  on  each  line. 


144 


THE  PHILOSOPHY  OF  ACCOUNTS 


PQ 


o 


o 

G 
W 


8 
ra 


pq 


ra 


THE  DETECTION  OP  ERRORS  145 

Thus,  suppose  that  a  customer,  John  Smith,  owed  at  the 
previous  trial  balance  $279.43;  that  he  purchased  several  bills, 
posted  from  the  sales  book,  amounting  to  $265.67;  that  he  was 
charged  by  journal  entry  with  a  sum  of  $24.38;  that  he  was 
credited  "by  cash"  $200;  and  that  therefore  he  owes  at  this 
balancing  time  a  balance  of  $369.48.  Entries  would  then  appear 
in  columns  i,  2,  4,  5,  8,  and  n,  as  follows: 

Column    i  John  Smith  [or  folio] 

2  Old  Balance  Dr $279.43 

4  Debits  from  Sales 265.67 

5  Debits  from  Journal 24.38 

$56948 

8  Credits  from  Cash $200.00 

1 1  New  Balance  Dr 369.48 


Only  two  of  the  Balance  columns  can  possibly  be  required  in  any 
given  account. 

349.  Having  entered  these  figures,  they  should  be  immedi- 
ately added  across  on  each  page,  and  as  the  total  of  each  is 
$569.48,  the  conclusion  is  that  the  account  is  correctly  balanced, 
though  nothing  is  yet  known  as  to  the  correctness  of  the  postings. 
Consistency  with  itself,  not  conformity  to  its  prototypes,  is  all 
that  is  demonstrated  of  the  ledger.  But  frequently  the  entire 
error  is  discovered  during  the  process,  not  having  been  caused  by 
erroneous  posting,  but  by  erroneous  combination  of  correct 
entries  (class  9,  Article  339). 

At  the  bottom  of  the  page  each  column  is  added  and  it  is 
evident  that  as  every  line  was  in  equation,  so  the  aggregates 
must  also  obey  the  law : 

Old  debit  balances  +  debits  from  Cash  +  debits  from  Sales  + 

debits  from  Journal  +  new  credit  balances  =  old  credit  balances 
+  credits  from  Cash  +  credits  from  Invoices  +  credits  from 

Journal  +  new  debit  balances. 

If  this  does  not  hold  good,  something  is  wrong  either  with  the 
total  of  some  column  or  with  the  balancing  of  some  line  and  this 


146  THE  PHILOSOPHY  OP  ACCOUNTS 

must  be  discovered  before  passing  to  the  next  page.  In  an 
obstinate  case,  an  intermediate  footing  may  be  made  about  half- 
way down  the  page  and  this  again  tested  by  the  equation.  If 
this  aggregate  stands  the  test,  the  error  is  in  the  lower  part  of  the 
page;  if  it  fails,  the  error  is  above  it.  Thus  by  subdivision  the 
error  must  ultimately  be  located  and  corrected. 

It  is  recommended  that  the  totals  of  each  page  be  carried 
forward  to  the  next,  insuring  that  no  unbalanced  line  or  page  has 
been  left  behind. 

350.  It  may  be  thought  best  not  to  group  all  the  entries  of  a 
certain  kind  into  a  single  line,  but  set  them  down  in  detail,  using 
as  many  lines  as  necessary.     In  the  example  in  Article  348,  the 
debits  from  Sales,  $265.67,  may  be  4  items;  $82.65,  $25.33,  $91.25, 
and  $66.44.     Then  the  account  as  tabulated  will  occupy  four 
lines  in  depth  instead  of  one. 

Column  I  2  4  5  8  n 

John  Smith 279.43          82.65  24.38  200  369.48 

25-33 
91.25 
66.44 

Tobias  Smollett  etc. 

This  makes  the  cross-addition  a  little  more  difficult,  but,  as 
fewer  accounts  can  be  entered  on  a  page,  the  cross-addition  of 
each  line  may  be  omitted  till  the  bottom  and  then  the  entire  page 
be  proved  as  a  whole. 

351.  Accounts  like  Cash  and  Merchandise,  or  what  we  have 
been  calling  "basic"  accounts,  must  be  left  to  the  last.    Every- 
thing else  is  added  up  and  probably  without  going  any  further  the 
error  will  stand  revealed.     Column  3  should  tally  with  the  total  of 
cash  paid,  or  there  is  error  there;  column  4  with  the  total  of 
sales,  column  8  with  the  total  of  cash  received,  column  9  with 
the  total  of  purchases,  and  a  discrepancy  in  either  of  these  totals 
must  be  traced  by  checking  of  the  department  in  default. 

352.  To  complete  the  tabulation  the  accounts  of  Cash  and 


THE  DETECTION  OF  ERRORS  147 

Merchandise  (or  the  basic  accounts,  whatever  they  are)  must  be 
transcribed  into  linear  form,  commencing  with  the  old  balances 
and  ending  with  the  new.  The  debit  and  credit  entries  will 
undergo  a  kind  of  reversal:  in  the  Cash  account  the  receipts  will 
be  entered  below  the  payments  in  column  3,  the  payments  under 
the  receipts  in  column  8;  the  purchases  under  the  sales  in  column 
4,  the  sales  under  the  purchases  in  column  9.  But  the  line  of 
Cash  and  that  of  Merchandise  will  be  in  balance  and  the  entire 
ledger  will  be  tabulated.  The  columns  will  then  correspond  in 
pairs,  as  follows: 

The  totals  will  be  equal,  of  columns  2  and    7. 

3  and    8. 

4  and    9. 

5  and  10. 

6  and  n. 

Columns  2  and  7  having  been  compared  with  the  totals  of  the 
old  trial  balance,  so  that  nothing  may  be  omitted,  columns  6  and 
1 1  will  constitute  the  new  trial  balance. 

353.  It  has  even  been  thought  worth  while,  in  case  the  trial 
balance  is  taken  at  long  intervals,  to  go  first  through  the  opera- 
tion of  tabulating  instead  of  starting  with  the  simple  trial  balance, 
columns  6  and  n  constituting  the  complete  and  only  proof  of 
accuracy.  This  is  a  laborious,  but  very  thorough  and  satisfactory 
mode  of  proof. 


CHAPTER  XXI 
FIDUCIARY  ACCOUNTS 

ACCOUNTANCY  OF  ADMINISTRATION,  WITHOUT  PROPRIETORSHIP — NAME 
OF  FIDUCIARIES — PURPOSE  OF  ACCOUNTING — FUNCTIONS  OF  THE 
FIDUCIARY — EQUATION  OF  FIDUCIARY  ACCOUNTS — EXECUTORS'  AC- 
COUNTINGS— LIABILITIES  OMITTED  FROM  INVENTORY — ACCOUNTS 
TRANSFORMED  INTO  SCHEDULES — SAVINGS  BANKS  REALLY  FIDU- 
CIARIES 

354.  In  the  foregoing  chapters,  the  accountancy  was  that  of 
proprietorship,  either  sole  or  joint.    The  accounts  were  of  two 
classes,  constantly  offsetting  each  other:  accounts  representing 
the  proprietor  in  his  relations  with  the  outside  world,   and 
accounts  representing  things  owned  by  him  and  persons  in 
relation  with  him. 

355.  There  is  another  class  of  accounts  in  which  this  idea  of 
proprietorship  is  nearly  or  entirely  absent,  and  its  place  is  taken 
by  responsibility  or  accountability.    It  always  arises  from  dele- 
gated authority,  the  affairs  being  placed  under  the  control  of 
some  person  as  representative  of  the  actual  owner  whose  ob- 
ject in  keeping  accounts  is  to  prove  that  he  has  faithfully  ad- 
ministered them. 

356.  The  one  who  administers  affairs  which  are  not  his  own  is 
variously  named  according  to  the  nature  of  his  functions  or  the 
source  of  his  appointment.    The  trustee  conducts  the  affairs  of  a 
cestui-que-trust  or  beneficiary;  the  administrator,  or  (if  appointed 
by  will)  the  executor,  manages  the  estate  of  the  decedent,  who  is 
either  intestate  or  a  testator;  the  guardian  has  charge  of  the 
affairs  of  a  ward;  the  committee  in  lunacy,  of  those  of  an  incom- 
petent; the  comptroller  of  a  city,  its  financial  affairs;  a  receiver  is 
appointed   for   a   bankrupt;  an  assignee  for  an  insolvent;  the 

148 


FIDUCIARY  ACCOUNTS  149 

treasurer  of  a  society  or  hospital  or  college  accounts  for  its  prop- 
erty, and  its  revenue  and  disbursements;  a  private  person  may 
confide  his  affairs  to  an  agent,  attorney-in-fact,  bailijf,  or  steward. 
These  terms  are  not  uniformly  used,  there  being  many  local 
variations.  In  all  these  cases  the  legal  ownership  is  in  the 
trustee,  but  the  equitable  ownership  in  those  whom  he  represents. 

357.  The  essence  of  fiduciary  accounting  is  the  ascertaining 
to  what  extent  the  person  holding  these  delegated  powers  has 
fulfilled  his  duties  and  to  what  extent  he  is  still  accountable.    He 
is  charged  with  all  property  coming  under  his  control,  and  he  is 
discliarged  by  any  lawful  disposal  of  it  for  the  good  of  the  estate. 

358.  An  Estate  account  shows  the  extent  of  the  accountability 
with  which  he  is  burdened  at  any  tune  and  this  is  a  credit  account 
corresponding  to  the  proprietary  account  in  commercial  book- 
keeping.    It  is  not  necessarily  a  measure  of  the  wealth  of  the  real 
proprietor  but  only  of  that  which  has  come  into  the  hands  of  the 
administrator  of  the  trust  and  has  not  been  duly  disposed  of. 

359.  What  would  be  assets  of  the  proprietor  are  charges 
against  the  administrator;  but  he  may  sometimes  incur  liabilities 
for  which  the  estate  is  holden  and  if  he  satisfies  these,  or  those 
to  which  the  estate  was  subject,  he  is  entitled  to  discharge  thereby. 

360.  The  functions  of  a  fiduciary  (by  which  term  I  describe 
generically  any  of  the  above  representatives)  may  be  considered 
under  five  heads: 

1.  Liquidation,  or  the  reduction  to  a  distributable  form  of 

the  assets,  and  payments  of  the  liabilities. 

2.  Collection  of  income. 

3.  Distribution  of  principal  or  income,  or  both,  to  whom 

it  may  concern. 

4.  Reinvestment. 

5.  Business  management. 

The  executor  or  administrator  is  primarily  a  liquidator.    His 
duty  is  to  convert  the  assets  into  cash,  to  extinguish  the  liabili- 


150  THE  PHILOSOPHY  OF  ACCOUNTS 

ties,  and  to  distribute  the  estate,  performing  the  first  and  third 
functions.  Incidentally,  he  performs  the  second  in  the  mean- 
time. With  the  fourth  and  fifth  he  is  not  ordinarily  concerned. 
The  testator,  however,  may  have  directed  in  his  will  that  the 
estate  be  not  all  distributed  forthwith,  but  certain  property  or 
certain  sums  are  to  be  retained  by  a  trusteee  who  is  frequently 
the  same  person  as  the  executor.  The  trustee  has  as  his  duties 
the  second  and  third  functions,  often  the  fourth. 

361.  When  the  fifth  function  is  predominant,  the  accounts  are 
indistinguishable  from  those  of  proprietary  concerns;  the  struggle 
is  for  the  attainment  of  wealth  by  the  use  of  capital  and  the 
fiduciary  departs  from  his  proper  functions  as  liquidator,  col- 
lector, and  distributor.    The  "estate"  then  stands  in  the  light  of 
the  capitalist  and  the  fiduciary  idea  is  eclipsed.    But  as  we  re- 
cede from  this  to  the  original  idea  of  a  trust,  the  point  of  view  is 
changed  and  the  equation  becomes: 

What  I  am  charged  with  =  what  I  can  show  as  discharged 
+  the  net  estate  for  which  I  am  accountable 

362.  The  transactions  of  a  fiduciary  are  analogous  to  those 
of  a  proprietary  concern,  but  looked  at  inversely.    The  ego  is  not 
the  estate,  but  the  trustee.     The  two  correlative  sets  of  accounts 
spoken  of  in  Article  354  exist,  but  it  is  the  debits  of  the  trustee 
against  the  credits  of  the  estate,  instead  of  the  debits  of  the  out- 
siders against  the  credits  of  the  proprietor.    Yet  if  we  take  a 
transaction  and  analyze  it  after  the  manner  of  Chapter  IV,  we 
find  that  it  falls  into  the  same  debits  and  credits  whether  the 
equation  of  proprietorship  or  that  of  accountability  be  followed. 
An  increase  of  assets  or  an  increased  charge  by  reason  of  these 
assets  are  one  and  the  same  things  as  recorded.     It  is  not  neces- 
sary therefore  to  burden  the  mind  with  any  new  rules  for  the 
record  of  transactions. 

363.  In  strictly  fiduciary  accounting  the  economic  accounts 
are  minimized  and  there  is  no  economic  summary,  as  that  is  a 


FIDUCIARY  ACCOUNTS  151 

creature  of  business  management.  There  is  usually,  for  legal 
reasons,  a  very  severe  division  between  the  principal  of  the  estate 
and  its  income,  and  the  latter  is  not  thrown  periodically  into  the 
former,  but  held  in  a  separate  credit  balance,  there  being  in  this 
event  two  accounts: 

THE  ESTATE  OF ,  PRINCIPAL 

THE  ESTATE  OF ,  INCOME 

364.  Instead  of  a  balance  sheet,  the  fiduciary  presents  a  report 
or  accounting  to  the  authority  which  conferred  his  powers  upon 
him  and  this  is  by  the  custom  of  the  courts  composed  in  the 
form  of  "the  trustee  in  account  with  the  estate"  and  not  the 
converse,  the  fiduciary  stating  first  the  sums  with  which  he  is 
chargeable  and  then  what  he  claims  in  the  way  of  discharge. 
Excellent  models  of  such  statements  of  account  are  given  in 
Hardcastle  on  the  Accounts  of  Executors,  etc.,  and  more  recently 
by  John  R.  Loomis  in  The  Journal  of  Accountancy,  January, 
1907. 

365.  A  fact  which  will  strike  the  commercial  bookkeeper 
upon  examining  an  executor's  account  is  that  the  inventory  with 
which  it  begins  is  an  inventory  of  assets  only,  no  reference  being 
made  to  indebtedness  even  if  shown  on  the  books  of  the  decedent, 
and  no  deduction  being  made  for  them.    Debts  only  appear 
through  their  payment. 

366.  The  account  may  be  best  made  up  from  the  estate  ac- 
count by  reversal;  that  is,  the  fiduciary  charges  himself  for 
amounts  credited  the  estate  and  vice  versa;  this  being  preferable 
to  making  up  the  statement  from  the  other  accounts  because 
mere  permutations  would  have  to  be  eliminated.    The  accounts 
should  be  kept  with  constant  reference  to  the  statement  to  be 
made  to  the  court;  and  it  is  very  desirable  that  each  schedule 
should  be  represented  by  an  account  in  the  books  of  the  fidu- 
ciary; the  name  of  the  schedule  may  form  part  of  its  title;  as  for 
example : 


152  THE  PHILOSOPHY  OF  ACCOUNTS 

SCHEDULE  A 
INCREASE  ON  APPRAISED  VALUE 

Any  asset  being  sold  at  an  increased  price,  and  the  account 
representing  it  having  been  credited  by  cash  received,  the  excess 
would  be  charged  to  the  asset  account  and  credited  (not  directly 
to  the  estate  but)  to  Schedule  A  account.  At  the  time  of  ac- 
counting Schedule  A  would  be  closed  into  Estate  account  in  one 
sum. 

367.  It  may  be  useful  to  illustrate  the  transformation  of  an 
Estate  account  into  an  accounting  by  an  executor,  who  substi- 
tutes charges  against  himself  for  credits  to  the  estate  and  vice 
versa.     It  is  supposed  that  accounts  have  been  opened  as  follows : 

1.  Estate  of  D.  C.  Dent. 

2.  Inventory. 

3.  Schedule  A;  increase  on  appraised  value. 

4.  Schedule  B ;  assets  not  in  inventory. 

5.  Schedule  C;  income. 

6.  Schedule  D ;  decrease  on  appraised  value. 

7.  Schedule  E;  funeral  charges  and  testamentary  expenses. 

8.  Schedule  F;  debts  and  claims. 

9.  Schedule  G;  payments  to  widow. 

10.  Schedule  H;  expenses  of  administration. 

11.  Cash. 

The  accounts  begin  with  the  one  entry: 
Inventory/Estate 

As  the  cash  balance  is  included  in  the  inventory,  and  as  it  is 
necessary  to  record  the  process  of  liquidation,  the  cash  balance 
must  be  transferred  to  a  separate  account : 

Cash/Inventory 

The  two  accounts,  Cash  and  Inventory,  represent  the  execu- 
tor and  all  the  others  represent  the  estate. 

368.  The  executor  then  performs  the  following  functions,  and 
records  them  by  the  respective  formulas: 


FIDUCIARY  ACCOUNTS  153 

Realization  of  assets  in  inventory : 
Cash/Inventory 
When  such  assets  bring  more  than  the  inventoried  value: 

Inventory/Schedule  A 
When  such  assets  bring  less  than  the  inventoried  value: 

Schedule  D/Inventory 
Realization  of  assets  not  in  inventory: 

Cash/Schedule  B 
Collection  of  income : 

Cash/Schedule  C 
Necessary  payments : 

Schedule  E,  F,  G,  or  H/Cash 

369.  At  the  time  of  balancing,  all  the  other  accounts  are  closed 
into  the  Estate  account.  It  would  be  advisable  to  carry  in  the 
balances  of  Cash  and  Inventory  in  red  ink,  as  they  are  the  only 
balances  which  are  to  be  carried  forward  to  the  next  accounting. 

FIGURE  55 
ESTATE  OF  D.  C.  DENT 


Schedule  D  . 

$      600 

Inventory    .  . 

$43  ooo 

E  

1,200 

Schedule  A  

2,000 

F  

8,100 

"        B  

.    .    .  .         1,500 

G  

2.4.00 

"        C  

300 

"        H  

2.  1  SO 

Inventory  

6,OOO 

Cash  

26,150 

$46,800 

$46,800 

The  arrangement  of  schedules  is  here  precisely  the  same  as 
that  employed  by  Mr.  Loomis  in  the  paper  cited  in  Article  364. 
I  have  not  constituted  an  account  for  Schedule  J,  being  "  items 
in  inventory  uncollected,"  for  the  reason  that  I  think  these  are 
better  obtainable  from  the  Inventory  account  itself. 


154 


THE  PHILOSOPHY  OF  ACCOUNTS 


The  following  would  be  the  same  account  translated  into  the 
form  of  a  surrogate's  account,  following  the  summary  given  by 
Mr.  Loomis: 

SUMMARY 

I  charge  myself 

With  amount  of  Inventory $43,000 

Schedule  A 2,000 

B 1,500 

C 300 

Total  Charges $46,800 

I  credit  myself 


Total  Credits 

Leaving  a  Balance  of 


f  Schec 

lule  D  

$     600 

E  

1,200 

i 

F  

8.  wo 

• 

G  

2.4.00 

i 

H  

2,  1  SO 

« 

J  . 

6,000 

s  

20,650 

$26,150 


By  comparing  this  with  Figure  55  it  will  be  seen  that  the 
charges  of  the  accounting  are  made  up  from  the  credit  of  the 
Estate  account  and  the  credits  of  the  accounting  from  the  debit 
side  of  the  Estate  account. 

370.  It  is  not  necessary  to  go  as  far  into   the  details  of 
fiduciary  bookkeeping  as  we  have  with  that  of  proprietary  book- 
keeping, since  most  of  the  mechanism  of  the  latter  is  applicable 
to  the  former,  and  those  details  are  derivable  from  the  excellent 
treatises  of  Hardcastle  and  Gottsberger. 

371.  It  may  be  remarked  that  the  accounts  of  a  savings  bank 
(of  the  eastern  or  mutual  type)  while  usually  treated  on  the 
proprietary  basis  are  strictly  speaking  fiduciary.    The  legal  cor- 
poration is  the  board  of  trustees,  yet  they  have  no  equitable  inter- 
est in  the  assets;  they  merely  administer  a  trust.    The  depositor 
is  merely  a  creditor  to  the  amount  of  his  cash  deposits  and  such 
interest  or  dividends  as  have  been  allotted  him  by  the  board;  he 


FIDUCIARY  ACCOUNTS  155 

has  no  legal  title  to  the  surplus,  but  has  an  equitable  title,  with 
his  fellow  depositors,  to  it.  The  surplus  is  a  trust  fund,  for  the 
benefit  of  the  depositors  at  the  time  being,  but  not  divisible 
except  upon  liquidation. 

372.  The  failure  to  distinguish  between  proprietary  and 
fiduciary  accounts  has  led  to  some  errors,  such  as  the  creation  of 
a  fictitious  intermediary,  "The  Business,"  referred  to  in  Article 

133- 


MONOGRAPH  A 
THE  CASH  ACCOUNT 


MONOGRAPH  A 
THE  CASH  ACCOUNT 

DEFINITION  AND  EXTENSION  OF  "  CASH  "—SUBDIVISION  OF  CASH- 
VARIATIONS  OF  CASH  ACCOUNT — BANK  ACCOUNT  SUPERSEDED  BY 
CHECK  STUB — CHECK  BOOK  AS  POSTING  MEDIUM — COMPLEX  CASH 

BOOK— COLUMNIZATION,  TWO  PRINCIPLES— CONCOMITANTS— DIS- 
COUNTS AS  EXAMPLE— JOURNALIZATION  THROUGH  CASH— CHECK 
REGISTER — ALTERNATE  PAD  SYSTEM — STRIP  SYSTEM — BALANCING 
CASH — AUDITOR'S  DUTY  AS  TO  VERIFYING  CASH  BALANCE — VERIFICA- 
TION OF  BANK  ACCOUNT 

373.  "Cash"  taken  as  a  concrete  noun  signifies  in  accounts 
that  which  is  received  and  paid  in  settlement;  the  medium  of 
liquidation.  This  is  a  somewhat  imperfect  definition  of  some- 
thing which  varies  in  the  extent  of  its  meaning.  Some  would 
restrict  the  term  to  the  meaning  of  "money  "  alone,  but  even  then 
it  is  difficult  to  fix  the  limitations  of  money  itself.  Shall  we  con- 
fine it  to  full  legal- tender  specie,  or  shall  we  include  bank  notes 
and  treasury  notes,  which  are  really  certificates  of  indebtedness? 
We  find  that  those  who  endeavor  to  narrow  the  field  of  cash 
down  to  that  which  can  be  handled  are  inconsistent  in  so  doing. 
They  will  consider  the  check  of  another  as  cash,  although  it 
merely  conveys  the  power  to  receive  an  amount  from  some  bank, 
not  even  constituting  an  assignment  of  the  amount;  while  on  the 
other  hand  amounts  due  us  by  a  bank  which  need  no  act  to  make 
them  ours  are  excluded.  The  best  usage,  I  think,  recognizes  as 
the  subject  of  the  Cash  account  everything  which  can,  according 
to  business  custom,  be  used  without  question  to  extinguish  lia- 
bilities or  to  acquire  assets;  in  short,  to  carry  out  contracts. 
Whatever  is  acceptable  on  either  side  as  the  fulfilment  of  a  con- 
tract calling  for  dollars  (or  pounds,  francs,  marks,  etc.)  is  in  a 
business  sense  "cash."  In  its  potentialities  it  is  the  most  versa- 


160  THE  PHILOSOPHY  OF  ACCOUNTS 

tile  of  assets,  for  it  is  the  only  one  which  has  at  command  every 
existent  form  whatever  of  property  or  service. 

374.  The  cash  is  usually  separated  into  two  parts:  cash  on 
hand,  and  cash  on  deposit.    The  former  is  sometimes  called 
"office  "  cash  and  the  latter  subdivision  is  frequently  styled :  "bal- 
ance in  bank,"  or  (in  England)  "  cash  at  the  banker's."    The  lat- 
ter phrase  has  been  recently  criticized  by  eminent  British  author- 
ity for  fear  lest  it  should  be  thought  that  it  indicated  the  presence 
at  the  bank  of  sufficient  coin  or  other  tangible  money  specifically 
segregated  and  belonging  to  the  account.    But  these  fears  are 
groundless;  no  one  would  make  such  a  foolish  mistake. 

375.  In  modern  tunes,  cash  "on  hand"  or  in  physical  posses- 
sion is  overshadowed  by  bank  cash,  so  that  the  payment  of  cash 
calls  up  the  idea  of  writing  checks  rather  than  that  of  counting 
out  money.    The  latter  process  is  used  only  for  the  very  insignifi- 
cant dealings,  and  is  sometimes  designated  as  "petty  cash." 

376.  There  is  a  sense  in  which  the  Petty  Cash  account  is 
sometimes  kept  which  I  cannot  help  considering  as  improper  and 
dangerous.     It  is  when  the  money  transferred  to  Petty  Cash  is 
considered  as  expended,  as  far  as  the  regular  books  are  con- 
cerned, Petty  Cash  becoming  a  sort  of  economic  account,  equiva- 
lent to  "minor  expenses."    There  is  supposed  to  be  a  book  in 
which  the  keeper  of  the  petty  cash  records  the  expenditures,  but 
as  he  calls  for  round  sums  whenever  his  appropriation  is  nearly 
exhausted  there  is  nothing  in  the  system  which  makes  a  verifica- 
tion of  his  record  compulsory.     A  much  better  plan,  the  imprest 
system,  will  be  explained  hereafter. 

377.  There  is  almost  invariably  a  book  called  the  "cash 
book,"  which  contains  in  detail  all  the  transactions  affecting  the 
cash,  sometimes  with  other  information.    The  relation  of  this 
book  to  the  ledger  is  subject  to  the  following  variations: 

i.  There  is  a  Cash  account  in  the  ledger,  practically  a  sum- 
mary of  the  cash  book  in  weekly  or  monthly  aggregates  derived 
either  from  the  journal  or  from  the  totals  of  the  cash  book. 


THE  CASH  ACCOUNT  l6l 

2.  The  cash  book  is  itself  the  Cash  account,  just  as  if  it  were  a 
part  of  the  ledger  placed  for  convenience  in  a  separate  binding. 

378.  The  scope  of  the  cash  book  as  to  containing  more  or  less 
branches  of  the  cash  gives  rise  to  other  variations. 

1.  The  balance  of  the  cash  book  may  be  considered  as  con- 
sisting of  cash  on  hand,  alone.    All  bank  transactions  are  treated 
separately  through  a  bank  account  or  accounts. 

(a)  Deposits  are  usually  treated  as  received  into  the  office 
cash  and  then  paid  over  to  the  bank,  even  when  they  consist  of 
items  which  must  eventually  be  deposited. 

(b)  Checks  are  treated  in  one  of  two  ways : 

(1)  They  are  entered  on  both  sides,  as  if  the  money  were 

drawn  from  the  bank  and  then  paid  over. 

(2)  They  may  appear  in  the  bank  account  only,  debited  to 

the  payee  and  credited  to  the  bank. 

2.  The  balance  of  the  cash  book  may  be  considered  as  em- 
bracing both  cash  on  hand  and  that  on  deposit.    No  distinction 
is  made  in  the  money  columns  between  sums  paid  by  check  and 
those  paid  from  cash  on  hand;  nor  between  receipts  remaining 
on  hand  and  those  deposited  in  bank,  although  such  distinction 
may  easily  be  indicated  in  the  text.    At  each  occasion  of  balanc- 
ing the  cash,  however,  the  components  must  be  separately  stated: 
so  much  in  bank,  so  much  on  hand,  total  so  much. 

3.  By  double  columns  on  each  side  the  cash  on  hand  and 
that  in  bank  are  kept  in  the  same  book  and  yet  distinct.    Cross 
entries  affecting  both  columns  represent  transfers  between  the 
bank  and  the  office.    This  would  appear  from  the  text  books  to  be 
the  favorite  method  in  Great  Britain. 

4.  By  the  imprest  system  all  transactions  are  forced  ulti- 
mately to  pass  through  the  bank.    The  imprest  is  a  fixed  sum, 
usually  an  even  amount,  which  is  held  in  the  office  for  the  pay- 
ment of  petty  purchases.    There  may  be  several  imprests  in  the 
hands  of  various  subordinates.    When  any  payment  is  made 


1 62  THE  PHILOSOPHY  OP  ACCOUNTS 

from  the  imprest  cash,  the  bill,  receipt,  or  voucher  is  counted 
temporarily  as  cash  on  hand,  thus  keeping  the  balance  intact.  If 
the  imprest  consists  of  $100,  this  may  be  $77  of  it  in  payments 
made  and  receipted  for  and  $23  in  actual  money.  But  from 
time  to  time  the  imprest  must  be  replenished  and  always  from  the 
bank,  a  check  being  drawn  for  the  entire  $77  exactly  and  entered 
to  the  debit  of  the  appropriate  accounts;  the  check  is  cashed  and 
the  proceeds  placed  in  the  imprest.  By  making  all  other  pay- 
ments by  check  and  by  depositing  all  cash  received,  without 
exception,  the  cash  transactions  are  faithfully  represented  by 
the  bank  account,  and  the  cash  balance  at  any  time  is  the 
bank  balance  plus  the  fixed  imprest.  In  this  way  the  Cash 
account  is  checked  from  an  independent  source,  the  books  of 
the  bank. 

379.  The  bank  account  to  which  the  Cash  account  is  now 
reduced  is  sometimes  kept  in  the  ledger,  but  the  most  detailed 
account  is  always  contained  in  what  is  known  as  the  "stub"  of 
the  check  book.    And  there  is  no  reason  why,  if  this  stub  account 
is  carefully  kept,  it  should  not  supersede  the  bank  account 
altogether. 

380.  Instead  of  a  wide  stub  from  which  the  checks  are  torn, 
an  interleaved  check  book  may  be  used,  a  leaf  of  checks  between 
two  pages  which  contain  the  account  of  checks  and  deposits. 
In  keeping  this  account,  the  totals  should  be  carried  forward 
from  page  to  page,  not  balanced  at  the  foot  of  the  page  as  is  fre- 
quently done  where  the  contents  of  the  check  book  are  to  be 
transcribed  into  a  cash  book. 

381.  The  Cash  account  is  thus  superseded  by  the  check  book 
record,  which  would  have  to  be  kept  anyhow,  and  the  procedure 
is  greatly  simplified.    The  old  way  was  to  copy  the  contents  of 
the  check  book,  together  with  the  transactions  of  the  office  cash 
into  a  cash  book;  then  to  journalize  this  cash  book,  repeating  all 
its  contents;  then  to  post  from  the  journal  to  the  ledger,  which 
includes  a  Cash  account  as  the  fourth  version  of  the  same  history. 


THE  CASH  ACCOUNT  163 

382.  Fiduciary  accounts  (Chapter  XXI)  lend  themselves  par- 
ticularly well  to  this  plan  of  making  the  check  book  into  a  com- 
plete cash  book.    Trust  funds  should  always  be  kept  separate 
from  individual  cash,  and  the  proper  way  is  for  the  fiduciary  to 
open  a  bank  account  for  and  in  the  name  of  each  trust  which  he 
may  assume.    His  check  book,  suitably  kept,  will  serve  as  the 
chief,  or  the  only,  book  of  account  and  posting  medium.    By  the 
use  of  side  posting  (Article  271)  he  may  minimize  the  labor  of 
posting  to  a  ledger  or  may  dispense  with  it  altogether  if  his  ac- 
countability is  solely  for  cash  as,  for  example,  the  treasurership 
of  a  society;  classification  of  receipts  and  expenditure  being  the 
only  aim. 

383.  This  plan  of  making  the  check  book  the  medium  of  all 
transactions  will  not,  for  various  reasons,  be  always  practicable. 
When  there  are  several  bank  accounts  and  several  cashiers,  it  will 
often  be  simpler  to  unite  their  results  in  what  may  be  called  a 
"  complex' '  cash  book.    This  may  be  in  the  columnar  form  and  the 
columnization  may  be  on  either  of  two  principles:  the  one  divid- 
ing the  receipts  and  payments  according  to  the  branch  of  the 
cash  to  which  they  relate,  the  other  according  to  the  contra 
accounts  involved  in  the  transactions,  the  accounts  credited  when 
Cash  is  debited,  and  debited  when  Cash  is  credited;  credited  "by 
Cash"  and  debited  "to  Cash." 

On  the  former  plan,  there  will  naturally  be  a  pair  of  columns 
for  each  bank  and  a  pair  of  columns  for  each  cash-keeper  and 
also  a  pair  of  columns  for  "the  public."  These  last  columns 
record  those  transactions  which  increase  or  decrease  the  total 
cash  balance,  as  distinguished  from  those  which  are  transfers 
between  branches  or  receptacles.  The  public  columns  exactly 
correspond  to  the  entries  of  Mode  2.  Each  transaction  must 
necessarily,  in  this  plan,  enter  into  two  columns,  possibly  into 
more.  If  it  is  an  interior  transaction,  a  shifting  between  depart- 
ments, there  must  be  a  receipt  in  one  and  a  payment  in 
another.  If  it  is  an  actual  receipt  or  payment,  from  or  to  the 


1 64 


THE  PHILOSOPHY  OF  ACCOUNTS 


outside  world,  it  must  affect  the  Public  column  and  also  some 
department. 

384.  The  arrangement  of  these  columns  may  be  somewhat  as 
follows: 

FIGURE  56 


RECEIVED 

PAID 

Prom 

From 

Prom 

From 

From 

To 

To 

To 

To 

To 

Teller 

Teller 

C 

D 

the 

the 

D 

C 

Teller 

Teller 

A 

B 

Bank 

Bank 

Public 

Public 

Bank 

Bank 

B 

A 

Or  perhaps  these  headings  would  be  preferable: 


Disbursed 
by  Tellers 

Drawn 
from  Banks 

Received 
from  the 
Public 

Parti- 
culars 

Paid 
to  the 
Public 

Check 
List 

Deposited 
in  Banks 

Received 
by  Tellers 

Mr. 
A 

Mr. 
B 

C 

Natl. 

D 
Natl. 

D 

Natl. 

C 

Natl. 

Mr. 
B 

Mr. 
A 

The  Check  List  column  is  a  convenience  for  summing  up  the 
items  received  and  to  be  deposited. 

385.  The  second  mode  of  columnization  does  not  concern 
itself  with  the  components  of  the  cash,  but  with  the  consideration 
which  caused  it  to  change  hands,  the  equivalents  which  were 
received  and  given;  the  wherefore,  not  the  where.    This  is  done 
for  the  purpose  of  forming  totals  which  may  be  posted  in  mass, 
usually  monthly,  or,  following  the  old  conceptions,  to  make  the 
cash  book  self-journalizing. 

386.  Both  kinds  of  cash  book  may  be  kept  concurrently  in  an 
extensive  business,  where  all  cash  transactions  have  their  origin  in 
tickets  or  vouchers.   They  will  usually,  then,  be  a  daily  cash  book 
of  the  first  columnar  plan  and  a  monthly  cash  book  of  the  second, 
the  former  being  balanced  every  day  and  the  latter  at  the  end  of 
each  month. 


THE  CASH  ACCOUNT  165 

387.  The  monthly,  or  journalized  cash  book,  as  well  as  the 
simple  form  2,  admit  of  columnizing  some  values  which  are  not 
receipts  nor  payments,  but  are  concomitants  of  those  transactions; 
and  thus  the  keeping  of  a  special  posting  medium  is  avoided.   As 
an  example  of  this,  we  may  take  the  subject  of  cash  discounts. 

388.  Indebtedness  for  purchases  is  usually  subject  to  a  stipu- 
lation that  the  purchaser  may  settle  at  an  earlier  time  than  is 
required  by  the  contract  and  in  consideration  of  such  prepayment 
shall  be  entitled  to  a  discount  stated  in  a  percentage  of  the  full, 
or  gross,  price.    Thus  it  happens  that  many,  or  most,  of  the  cash 
amounts  paid  or  received  in  settlement  of  such  indebtedness  are 
less  than  the  amount  standing  on  the  account  as  due;  and  that  it 
cannot  be  determined  until  the  payment  is  actually  made  whether 
the  discount  option  will  be  utilized,  or  at  what  rate.    In  case  of  a 
debtor  the  settlement  will  be: 

Cash         )      ._ 

.-.  r    /Customer 

Discount  ) 

The  discount  is  a  concomitant  of  the  cash  entry  and  it  will 
evidently  be  an  advantage  if  the  entries  can  be  made  concurrently 
without  having  to  repeat  the  particulars.  For  this  purpose  two 
additional  columns  are  provided,  one  for  the  gross  amount  of  the 
bill,  one  for  the  amount  of  the  discount,  and  the  third  for  the 
actual  cash  received. 

CUSTOMERS 


Gross 

Discount 

Cash 

$2,934.62 

$58.69 

$2,875.93 

The  third  column  only  is  used  for  balancing  the  cash.  The  middle 
column  in  total  is  posted  at  the  end  of  the  month  to  the  debit  of 
Discount,  an  economic  account,  the  aggregate  of  which  at  the 
balancing  period  should  be  carried  to  the  debit  of  Sales,  or  of  the 
Trading  account.  The  first  column  is  equal  to  the  sum  of  the 


166  THE  PHILOSOPHY  OP  ACCOUNTS 

other  two  if  the  subtractions  of  the  discount  have  been  correctly 
made  and  this  test  should  always  be  applied. 

389.  As  to  posting  to  the  customer's  account  the  simplest  way 
is  post  the  gross  amount  without  distinguishing  between  cash 
and  discount.    It  might  be  thought  best  to  state  these  separately, 
in  order  to   leave   a   record   of   whether   the   customer  pays 
promptly  or  foregoes  discount;  but  if  this  is  not  sufficiently  indi- 
cated by  the  date,  a  memorandum  of  the  rate  of  discount  may 
be  inserted  in  the  posting;  as: 

Apr.  5  (-  2%),  $2,934.62 
which  would  be  far  more  expressive  than: 

Apr.  5  By  Cash,  $2,934.62 

390.  Another  way  of  entering  the  discount  without  a  con- 
comitant column  is  to  represent  that  the  entire  amount  has  been 
received  and  the  discount  refunded: 

Received  from  Customer $2,934.62 

Expended  for  Discount $58.69 

This  follows  the  fact  less  closely  than  the  method  by  concomi- 
tant column,  and  it  does  not  agree  with  the  bank  pass  book,  which 
will  record  only  $2,875.93  as  deposited. 

This  latter,  more  fictitious  method  by  two  cash  entries  is  often 
used  for  discounting  bills  receivable,  but  even  there  I  think  the 
concomitant  method  will  frequently  be  found  preferable. 

391.  In  Article  275  a  device  was  explained  by  which  the  cash 
book  is  made  to  perform  the  work  of  the  journal  by  introducing 
two  equal  and  opposite  amounts.   This  would  be  objectionable  in 
a  check  book  used  as  cash  book,  for  it  would  break  up  the  corre- 
spondence between  the  account  kept  by  the  bank  and  that  kept  by 
the  depositor.     Nevertheless  the  shifting  of  debits  and  credits 
may  be  effected  by  drawing  a  check  to  your  own  order,  and, 
instead  of  issuing  it,  depositing  it  to  your  own  credit.    For  ex- 


THE  CASH  ACCOUNT  167 

ample,  A  is  a  customer  who,  besides  buying  of  you,  occasionally 
sells  you  some  special  article.  As  you  prefer  to  keep  your  personal 
debtors  and  creditors  separate,  you  have  two  accounts  with  A, 
one  in  each  capacity.  He  owes  you  $270  on  the  one  account  and 
you  owe  him  $30  on  the  other.  He  sends  you  the  net  amount 
$240,  instead  of  sending  $270  and  waiting  for  you  to  return  $30. 
To  avoid  a  journal  entry  transferring  the  $30  from  one  account 
to  the  other,  you  draw  a  check  for  the  $30  not  to  his  order  but  to 
your  own,  since  he  has  already  paid  himself;  this  check  you  charge 
to  him,  but  deposit  it  along  with  the  $240,  making  up  the  $270 
necessary  to  balance  his  account  as  a  customer. 

392.  The  reduction  of  the  cash  book,  the  Cash  account,  and  the 
bank  account  to  the  one  form  of  the  check  book  is  a  great  simpli- 
fication, but  it  has  been  found  that  the  check  book  itself  may  be 
simplified.  What  is  known  as  the  check  register  is  beginning  to 
supplant  it.  Instead  of  containing  only  three,  or  at  most  six 
checks  to  a  page,  thirty  to  fifty  may  be  described  on  a  page,  pro- 
vided we  utterly  abandon  the  idea  of  a  stub  from  which  the  check 
is  torn  and  enter  the  descriptive  matter  on  a  single  line.  The 
checks  are  made  up  in  pads  and  are  numbered  in  advance,  as  are 
also  the  lines  of  the  register.  The  rule  must  be  inflexible  that  the 
entry  on  the  register  shall  be  made  first  and  the  check  filled  out 
from  it;  in  fact,  this  ought  to  be  the  rule  when  the  stub  is  used, 
for  a  check  might  be  issued  without  record.  The  vacant  stub  is 
somewhat  more  of  a  reminder  than  the  numbered  line,  yet  it  is 
thought  better  to  forego  this  advantage  rather  than  to  lose  so 
much  time  in  adding  up  every  four  or  five  checks. 

This  plan  is  mostly  used  by  banks  issuing  drafts  which  are 
practically  checks  on  other  banks,  and  is  then  called  a  "draft 
register."  Its  introduction  is  facilitated  by  the  fact  that  no 
contra  account  of  deposits  needs  to  be  kept  on  the  same  page. 

Without  the  invention  of  blocks  or  pads  of  blanks,  which  keep 
the  papers  firmly  in  their  proper  order,  this  form  of  register  would 
have  been  impracticable. 


1 68  THE  PHILOSOPHY  OF  ACCOUNTS 

393.  I  propose  a  new  method  of  handling  the  cash  transac- 
tions, or  rather  a  recurrence  to  the  original  plan  of  a  ledger 
account,  with  the  aid  of  the  following  comparatively  modern 
devices:  pads  of  blanks;  machine  numbering;  cards  or  loose 
leaves  for  accounts;  ticket  posting,  and  perhaps  carbon-duplica- 
tion. 

There  should  be  a  memorandum  blank  of  the  same  size  as  the 
check  and  bearing  the  same  number,  on  which  should  be  entered 
all  the  data  of  the  check  necessary  to  make  it  a  posting  ticket. 

FIGURE  57 
MEMORANDUM  OF  CHECK 


Check  No.  5693  on  First  National  Bank 

$500.  July  15,  1907 

Payable  to  William  Jones 
Charge  to  do 


CHECK 


No.  5693  New  York,  July  15,  1907 

FIRST  NATIONAL  BANK 

Pay  to  the  order  of  William  Jones 


Five  hundred Dollars 

$500.  John  Smith 


The  tickets  and  the  checks  should  alternate  in  the  same  pad,  the 
ticket  always  above  its  check,  so  that  it  would  be  impossible  to 


THE  CASH  ACCOUNT  169 

"forget"  to  make  the  entry,  and  this  plan  would  be  at  least  as 
effective  as  the  stub. 

394.  The  bank  account  would  be  kept  as  part  of  the  ledger 
on  its  own  card  or  its  own  leaves.     The  check  memorandum 
would  be  posted  to  the  credit  of  the  account  and  likewise  to  the 
debit  of  some  other  account  and  then  filed. 

395.  This  method  is  not  always  applicable,  as  there  are  cer- 
tain circumstances  which  seem  to  demand  the  existence  of  a 
check  book;  but  it  seems  to  me  to  be  very  nearly  the  ultimatum 
of  directness  and  simplicity. 

396.  A  modification,  using  carbon  duplication,  may  be  used 
'when  numerous  checks  are  drawn  in  succession  and  the  type- 
writer is  used  for  filling  them  in.    The  checks  will  be  on  a  long 
strip  with  perforations  between  (instead  of  being  padded)  and  a 
similar  strip  will  be  behind  it  with  the  carbon  between.    This 
strip,  taking  the  place  of  the  memorandum  tickets,  gives  a  fac- 
simile of  all  the  filling.    It  may  or  may  not  have  printed  matter 
so  as  to  interpret  its  contents. 

This  plan  has  been  used  with  great  success  for  pay-roll  checks 
drawn  on  a  bank  which  is  used  for  this  sole  purpose  and  where  a 
deposit  is  made  of  the  exact  total  of  each  set  of  checks,  which 
total  is  obtained  by  adding  the  carbon  strip.  In  this  case,  the 
strips  are  not  torn  off  and  used  as  posting  tickets,  since  no  indi- 
vidual accounts  need  to  be  kept  with  the  payee;  the  total  is  posted 
in  bulk  to  the  Labor  account. 

397.  In  whatever  form  the  account  of  cash  is  kept,  its  veri- 
fication, or  "  balancing  the  cash, "  cannot  be  neglected.    Cash  on 
hand  should  invariably  be  verified  daily,  because  the  difficulty  of 
tracing  an  error  increases  with  the  lapse  of  tune.    With  cash  on 
deposit,  which  is  less  liquid,  the  error  is  generally  hi  calculation 
only,  and  a  daily  proof,  though  not  so  necessary  as  in  cash  on 
hand,  is  still  desirable. 

398.  It  is  unnecessary,  and  generally  undesirable,  to  break 
the  columns  of  a  Cash  account  by  the  insertion  and  carrying  for- 


170  THE  PHILOSOPHY  OF  ACCOUNTS 

ward  of  a  balance.  A  memorandum  in  the  margin,  showing  that 
the  difference  between  the  two  totals  is  exactly  accounted  for  by 
the  values  found,  is  just  as  effective  for  this  purpose  and  the 
totals  themselves  generally  have  a  certain  utility. 

399.  The  bank  account  as  exhibited  in  the  check  book  should 
be  made  to  tally  with  that  rendered  by  the  bank  itself  in  the  pass 
book  or  the  monthly  statement.    This  is  a  most  valuable  cor- 
roboration  as  it  is  furnished  by  a  person  outside  of  the  con- 
cern.    Hence  in  any  suspected  case  of  fraud,  and  even  in  any 
ordinary  case,  the   accountant  will  seize   upon  the  pass  book 
and  check  book  as  among  the  most  valuable  bases  for  his  ex- 
amination. 

400.  In  case  of  audit,  it  has  been  claimed  by  some  that  the 
verification  of  the  cash  balance  is  no  part  of  the  duty  of  the 
auditor.    From  a  practical  standpoint,  I  should  be  disposed  to 
question  this  dictum,  and  an  actual  instance  may  be  adduced  to 
the  contrary.    A  trust  company,  as  receiver  of  a  hotel,  employed 
a  cashier  and  general  bookkeeper,  dishonest  and  afterwards  a 
convict.    The  trust  company  retained  a  firm  of  public  account- 
ants to  make  a  monthly  audit  of  the  accounts,  which  they  did, 
and  passed  them  as  correct.    The  actual  cash  balance,  however, 
was  very  different  from  that  shown  in  the  books,  which  was 
fictitious.    The  cash  on  hand  consisted,  in  addition  to  the  real 
money  needed,  of  a  large  amount  of  memorandums,  worthless 
checks,  etc.    This  would  have  made  the  balance  on  hand  appear 
absurdly  large,  but  the  embezzler,  to  conceal  this,  overdrew  the 
bank  account  constantly,  but  held  back,  unissued,  checks  to 
dealers  in  supplies,  which  had  been  regularly  signed,  and  the 
amount  charged  to  the  dealers'  accounts.    The  cash  balance  of, 

say $10,000 

was  composed  of  worthless  paper $40,000 

less  overdraft  at  bank 30,000 

$10,000 


THE  CASH  ACCOUNT  171 

The  auditors  paid  no  attention  to  this  on  the  ground  that  it  was 
not  their  duty  to  verify  the  cash  balance.  How  they  could 
neglect  the  balance  of  the  check  book  does  not  appear,  for  it  was 
the  posting  medium  for  the  dealers  ledger.  They  contented 
themselves  with  the  nominal  net  balance,  without  inquiring  into 
its  components;  they  do  not  appear  to  have  even  inquired  why 
the  bookkeeper  did  not  fill  out  a  printed  form  appearing  at  the 
end  of  each  month  in  the  general  cash  book  which  called  for  a 
detailed  statement  of  the  items  composing  the  cash.  It  seems  to 
me  that  an  audit  which  does  not  probe  the  bank  account  is 
almost  worthless.* 

401 .  In  the  verification  of  the  bank  balance,  it  seldom  happens 
that  the  same  result  is  shown  in  our  account  and  in  the  account 
rendered  by  the  bank.    The  cause  of  this  is  that,  as  in  other 
accounts  of  indebtedness,  there  is  an  interval  of  time  between 
the  payment  on  the  one  hand  and  the  receipt  on  the  other,  so  that 
the  transaction  is  for  a  tune  in  transit,  and  necessarily  appears 
under  one  date  in  one  account  and  under  another  in  the  other. 
Where  deposits  are  made  by  mail,  this  is  often  the  case.    Where 
checks  are  issued,  they  do  not  ordinarily  reach  the  bank  on  the 
same  day  and  frequently  are  "outstanding"  for  many  days.    It 
is  therefore  necessary  to  make  a  reconciliation  between  the  two 
balances  and  this  should  be  made  a  permanent  record,  so  as  to 
facilitate  the  next  following  reconciliation. 

402.  I  would  recommend  that  the  balance  of  our  account  be 
first  brought  down  and  made  the  basis  of  the  reconciliation,  a 
total  of  the  checks  being  inserted  above  the  balance,  as  in  Figure 
1 1 .    Next  the  deposit  side  is  examined.    This  is  composed  of  the 
previous  balance  which  was  adjusted  and  the  deposits  since 
made.    If  these  are  all  in,  the  totals  of  the  left-hand  side  should 
agree.    Next,  the  checks  actually  canceled  and  returned  should 


*  I  have  no  intention  to  assert,  nor  do  I  believe,  that  any  such  view  is  usual  among 
American  certified  public  accountants;  but  I  am  emphasizing  the  point  that  this  is  poor 
auditing.  Possibly  the  contract  for  auditing  expressly  excluded  verification  of  cash;  in 
that  case  the  trust  company  was  to  blame. 


172  THE  PHILOSOPHY  OF  ACCOUNTS 

be  compared  with  the  list  accompanying  them,  after  which  they 
should  be  reasserted  by  serial  numbers  into  the  order  in  which 
they  were  originally  drawn.  A  list  of  the  missing  checks  should 
then  be  made  up.  The  total  of  this  list  should  exactly  equal  the 
difference  between  the  two  aggregates  of  checks,  as  drawn  and  as 
paid. 

Having  thus  reconciled  each  side  of  the  account,  we  are  pre- 
pared to  record  the  results.  The  general  principle  to  be  followed 
is  that  we  must  bring  the  balance  on  our  books  into  conformity 
with  the  bank's  statement  for  a  moment,  so  that  in  the  next  recon- 
ciliation, if  there  is  no  variance,  one  side  will  be  identical.  If  the 
variance  is  caused  by  delay  only,  and  not  by  actual  error  on  either 
side,  we  restore  our  account  to  its  original  status. 

403.  Suppose  that  there  are  5  deposits  and  5  checks,  giving 
on  our  books  the  following  result : 


Deposits 

Checks 

$633.34 

No.  i 

$200.00 

522.19 

2 

400.00 

300.00 
456.97 

3 

4 

199-73 
108.00 

250.00 

5 

329-I4 

Total $1,236.87 

Balance.  .  .  .         925.63 

2,162.50  $2,162.50 


Balance $925.63 

If  all  the  deposits  have  reached  the  bank  and  all  the  checks 
have  been  paid,  the  figures  $2,162.50,  $1,236.87,  and  $925.63  will 
coincide  and  no  adjustment  will  be  necessary.  But  we  will  now 
suppose  that  checks  No.  2  and  No.  4  are  outstanding;  also  that 
the  last  deposit,  $250,  had  not  yet  been  credited  by  the  bank; 
therefore  the  balance  as  rendered  by  the  bank  is  $1,183.63,  the 
difference  between  $1,912.50  and  $728.87.  The  checks  outstand- 
ing are  re-entered  on  both  sides  of  our  account;  the  deposit  in 
transit  is  subtracted  from  the  balance,  which  then  agrees  on  the 


THE  CASH  ACCOUNT 


173 


debit  side  with  the  bank  statement;  but  the  deposit,  as  it  will 
reach  the  bank  before  the  next  reconciliation,  is  restored  to  its 
place. 


Total  

$1  2-ifi  87 

Balance  

925-63 

$2,162.50 

$2,162.50 

Balance  

$Q2'v6'; 

+  Checks  outstanding  .  .  . 

508.00 

—  Deposit  in  transit  

$i,433-63 
250.00 

Balance  as  per  pass  book 

$1,183.63 

No.  2  

$400  oo 

Deposit  in  transit  .  .  . 

250.00 

No.  4.. 

108  oo 

404.  An  audit  involving  checks  outstanding  can   only  be 
regarded  as  provisional  and  is  not  complete  until  those  checks 
have  been  paid  and  their  amounts  re-examined. 

405.  One  of  the  most  important  points  to  be  considered  in 
the  inauguration  of  a  system  of  accounts  is  the  method  of  handling 
the  cash  and  its  record  in  the  Cash  account,  whether  kept  in 
the  ledger,  in  a  cash  book,  or  in  a  check  book. 


MONOGRAPH  B 
THE  MERCHANDISE  ACCOUNT 


MONOGRAPH  B 

THE  MERCHANDISE  ACCOUNT 

SPECIFIC  AND  ECONOMIC  VALUES  IN  THE  SAME  ACCOUNT — NEITHER  PRE- 
DOMINANT— THE  MERCHANDISE  ACCOUNT  IN  THE  OLD  MIXED  FORM — 
DIFFERENT  VIEWS— DIFFICULTIES  IN  BOTH  VIEWS— EXAMPLE  OP 
THE  OLD  FORM — How  TO  CLOSE  IT — MODERN  FORM  EXEMPLIFIED 

406.  The  reader  has  been  cautioned  (Article  200)  against 
mixed  accounts;  that  is,  accounts  partly  specific  and  partly 
economic.    These  will,  however,  sometimes  occur  through  the 
imperfections  of  current  accounting:  an  account  which  is  normally 
economic  will  prove  to  have  a  residue  of  the  specific  when  it 
comes  to  the  nicer  adjustment  of  the  balance  sheet,  and  vice 
versa.    This  has  been  touched  upon  in  the  cases  of  Coal  (Articles 
174-181)  and  Interest  (Articles  185-194). 

407.  There  are  accounts,  as  sometimes  kept,  where  it  cannot 
be  said  that  either  the  specific  or  economic  character  predomi- 
nates, where  each  phase  is  important  and  essential,  and  where,  if 
practicable,  the  course  of  wisdom  would  be  to  create  two  accounts, 
one  representing  the  specific  and  the  other  the  economic  side  of 
the  transactions. 

408.  A  good  example  of  such  an  account  is  the  Merchandise 
account  in  the  form  still  prevalent  but  gradually  falling  into 
disuse.    It  is  not  recommended  for  adoption,  but  its  structure 
should  be  understood,  in  order  that,  when  encountered  in  the 
course  of  examination  of  accounts,  it  may  be  readily  disentangled. 

409.  Merchandise  is  something  bought  at  a  certain  cost  price 
for  the  purpose  of  selling  at  a  higher  price.    The  latter  price 
consists  of  two  parts — one  equal  to  the  cost,  which  it  repays,  the 
other  the  merchandise  profit,  which  is  earned  by  services  in 
bringing  the  goods  near  the  customer,  in  selecting  them  with 


178  THE  PHILOSOPHY  OP  ACCOUNTS 

reference  to  their  desirable  qualities,  in  providing  a  convenient 
place  where  they  may  be  inspected,  and  in  holding  enough  in 
stock  to  meet  all  reasonable  demands. 

410.  Viewed  in  this  light,  every  sale  is  properly  creditable  to 
two  accounts,  one  part  to  the  asset,  merchandise  parted  with,  the 
other  to  the  Income  account  for  the  profit. 

411.  But  it  seems  to  be  considered  in  retail  business,  even  on 
a  large  scale,  impracticable  to  separate  each  sale  into  its  two  ele- 
ments, and  to  know  at  each  transaction  how  much  goes  to  replace 
the  goods,  and  how  much  to  repay  the  merchant  for  services,  risk, 
and  expense.    One  would  suppose  it  feasible,  and  some  merchants 
find  it  so,  to  record  in  a  column  of  the  sales  book  the  original  cost 
of  each  article.    But  more  usually  the  sale  price  is  undivided. 

412.  The  Merchandise  account,  therefore,  becomes  a  mixed 
account.    On  the  debit  side,  it  contains  entries  at  cost  price,  and 
on  the  credit  side  at  selling  price.    No  correlation  is  revealed 
between  the  two  sets  of  values,  any  more  than  if  one  were  in 
rupees  and  the  other  in  reichsmarks. 

Hence  some  writers,  in  their  zeal  for  classification,  have  con- 
sidered the  Merchandise  account  as  purely  an  outlay  and  income 
account.  The  merchandise  is  considered,  not  as  property  but 
rather  as  a  mere  form  of  cash  expenditure  to  be  recouped  ulti- 
mately by  receipts  of  a  greater  amount,  the  resultant  being  profit. 
A  difficulty  arises  when  we  reflect  that  the  merchandise  on  hand 
is  property  of  too  great  value  to  be  ignored.  The  way  to  get  over 
this  difficulty  is  to  consider  the  merchandise  on  hand  as  an  adjust- 
ment— an  offset  to  the  purchases. 

413.  Other  authors  again  would  classify  this  account  as 
strictly  a  specific  account — an  asset.    The  difficulty  here  is  that 
if  we  attempt  to  balance  such  an  account  we  get  a  meaningless 
balance,  corresponding  to  nothing.     Hence  the  assumption  is 
made  that  there  is  an  increment  of  value  to  the  extent  of  the 
profit;  that  the  merchandise,  so  far  as  sold,  has  appreciated  to 
that  extent. 


THE  MERCHANDISE  ACCOUNT 


179 


414.  But  whether  the  Merchandise  account  be  regarded  as 
specific,  or  economic,  or,  as  I  contend,  mixed,  the  calculation  and 
the  recording  of  the  result  are  substantially  the  same.    Let  us 
take  as  an  example,  the  following  facts : 

Merchandise  on  hand  January  i $5.643.75 

Bought  during  January 2,644.18 

Sold  during  January 3,219.74 

Bought  during  February 1,845.17 

Sold  during  February 2,454.62 

Bought  during  March i  ,929.44 

Sold  during  March 1,728.96 

From  these  data  let  us  construct  an  account: 

FIGURE  58 
MERCHANDISE 

Jan.    i     Balance $5,643-75 

Purchases 2,644.18  Jan.           Sales $3,219.74 

Feb.                "        1,845.17  Feb.             "    2,454.62 

Mar.               "        1,929.44  Mar.             "    1,728.96 

But  from  this  we  can  draw  no  conclusion.  The  debit  side 
amounts  to  $12,062.54  and  the  credit  side  to  $7,403.32,  but  the 
difference,  $4,659.22,  is  not  an  asset,  for  that  would  be  assuming 
that  we  have  sold  at  cost  price;  and  it  cannot  be  a  loss,  for  that 
would  be  assuming  that  there  is  no  balance  remaining.  If  we 
know  the  profit,  we  can  ascertain  the  balance;  if  we  know  the 
balance,  we  can  ascertain  the  profit. 

415.  The  balance  on  hand,  ascertained  by  inventory,  is  the 
key  to  the  situation.    Assume  that  it  is  $6,894.16.    Then  we 
compute  the  profit  thus: 

Merchandise  on  hand  January  I $5,643-75 

Bought  in  January $2,644.18 

"  February 1,845-17 

"  March 1,929.44 

Total  bought 6,418.79 

Total  cost $12,062.54 

But  there  remains  unsold  at  cost 6,894.16 

Therefore  the  goods  sold  must  have  cost $5,168.38 


i  So 


THE  PHILOSOPHY  OF  ACCOUNTS 


But  they  produced: 

in  January $3,219.74 

February 2,454.62 

March 1,728.96 

Total  proceeds 7,403.32 

and  the  profit  must  be $2,234.94 

416.  We  can  now  complete  our  account. 

FIGURE  59 
MERCHANDISE 


Jam    I 
Jan. 

Balance  (inv.). 
Purchases  . 

2.644.18 

Tan. 

Sales  

$•1.210.74 

Feb. 

1,845.17 

Feb. 

2.4,54.62 

Mar. 

it 

I.Q2Q.44 

Mar. 

n 

1,728.96 

Profit  

2.274.04 

Balance  (Inv.) 

6.804.16 

$14,297.48 

$14,297.48 

$6,894.16  goes  to  the  balance  sheet;  $2,234.94  to  the  Profit 
and  Loss  account. 

417.  This  is  the  traditional  form  of  the  Merchandise  account 
and  suffices  perfectly  for  "balancing  the  books."    Its  defect  is 
that  it  nowhere  presents  a  clearly  contrasted  statement  of  the 
same  goods  at  the  two  prices — in  and  out — and  consequently  the 
average  percentage  of  profit  could  not  be  obtained  without  effort. 

418.  When   there  are  goods  returned,  whether  purchases 
returned  by  us  or  sales  returned  to  us,  the  confusion  is  still 
greater,  for  each  side  contains  some  values  at  cost  price  and  some 
at  selling  price.    To  illustrate  this,  let  us  vary  the  above  figures 
slightly,  the  final  results  being  the  same: 

Balance  January  i ,  as  per  Inventory $5,643.75 

We  purchased  in  January 2,760.18 

but  returned 1 16.00 

We  sold  in  January 3,452.74 

but  had  returned 233.00 

We  purchased  in  February 1,865.17 

but  returned ....                                           20.00 


THE  MERCHANDISE  ACCOUNT 


We  sold  in  February 

but  had  returned 

We  purchased  in  March 

but  returned 

We  sold  in  March 

but  had  returned 

Balance  March  31,  as  per  inventory. 


2,937.62 
483.00 

1,947-44 
18.00 

1,903-96 

175-00 

6,894.16 


419.  It  will  be  readily  seen  that  the  difficulty  of  obtaining 
intelligible  information  as  to  the  comparative  values,  in  and  out, 
is  even  greater  than  in  Figure  59,  and  that  to  obtain  such  infor- 
mation the  account  would  need  to  be  taken  to  pieces  and  made 
over: 

FIGURE  60 

MERCHANDISE 


Jan.      i 

Balance 

$S,64i.7S 

<i 

Purchases 

2,760.18 

Jan. 

Returns  .... 

$116.00 

ii 

Returns  .  .  . 

211.00 

Sales  

3,452.74 

Feb 

Purchases 

I  865  17 

Feb. 

Returns  

20.00 

ii 

Returns 

4.81.00 

Sales  

2,937.62 

Mar 

Purchases 

T  <M7  \H 

Mar. 

Returns  .  

18.00 

ii 

Returns 

Ijc  no 

ii 

Sales  

1.001.06 

"      ii 

Profit 

2  21d  O4. 

"       li 

Balance.  .  .  . 

6,894.16 

$15,342.48 

$15,342.48 

420.  An  account  which  needs  to  be  made  over  is  one  which  ought 
to  have  been  made  differently  at  first. 

421.  The  modern  practice  is  to  separate  the  Merchandise 
account  into  three:  Merchandise,  Sales,  and  Purchases;  or  at 
least  the  former  two. 

The  above  transactions  would  be  posted  as  follows: 

FIGURE  61 
MERCHANDISE 


Jan.  i     Balance $5,643-75 


182 


THE  PHILOSOPHY  OF  ACCOUNTS 
PURCHASES 


Jan.    Total  bought $2,760. 1 8 

Feb.       "        "        1,865.17 

Mar.       "    .    "        1,947-44 


Jan.    Total  returned  by  us     $116.00 
Feb.       "  "    "         20.00 

Mar.       "          "          "    "          18.00 


SALES 


Jan.    Total  returned  to  us    $233.00 
"    "        483.00 


Feb. 

Mar. 


175.00 


Jan.    Total  sold , 
Feb.       "      "    . 

Mar.       "       " 


$3,452.74 
2,937.62 
1,903.96 


Next  close  Purchases  into  Merchandise: 

PURCHASES 


Jan.    Total  bought  .... 

.  .     $2,760.18 

Jan.    Total  returned  by  us 

$116.00 

Feb.        "         " 

1,865.17 

Feb.       "          "         "     " 

20.00 

Mar.       "        "        

i  ,1)47.4.4. 

Mar.       "          "        "     " 

18  oo 

Net  Purchases  

$154.00 
6.418.70 

$6,572-79 

$6,572.79 

MERCHANDISE 


Jan.  Balance $5,643-75 

Jan. -Mar.  Purchases..  . .         6,418.79 

$12,062.54 

In  Sales  account  bring  down  the  balance: 

SALES 


Jan     Total  returned  to  us 

$2^.00 

Jan.    Total  sold  

$1.4.52  74, 

Feb        "         "            "  " 

AS^.OO 

Feb.       "       "     

2.077  62 

Mar       "         "            "  " 

1  75.OO 

Mar.       "       "    

I  QO'*  Q6 

CarTted  down  

$891.00 

7,40?.  ?2 

$8,294.32 

Net  Sales.... 

$8,294.32 
-       $7,403-32 

THE  MERCHANDISE  ACCOUNT 


183 


422.  The  cost  of  goods  sold  is  now  obtained  by  subtracting 
from  the  total  of : 

Merchandise $12,062.54 

thepresent  balance 6,894.16 

cost  of  goods  sold $5,168.38 

423.  The  only  two  accounts  remaining  open  are  Merchandise 
and  Sales. 

Sales/Merchandise $5,168.38 

Having  posted  this  entry,  the  Merchandise,  a  pure  asset  account, 
is  closed  into  the  balance  sheet ;  the  Sales  account,  a  pure  outlay 
and  income  account,  shows  the  cost  and  the  proceeds  of  the  same 
goods,  and  the  difference  is  carried  to  the  economic  summary. 

FIGURE  62 
MERCHANDISE 


Jan.  i          Balance 

$5.64V7^ 

Jan.-Mar.  Purchases.  .  . 

6,418.79 

Jan.-Mar.  Sales,  at  cost. 
Mar.  31       Balance  

$5,168.38 
6,894.16 

$12,062.54 

$12,062.54 

SALES 


Jan.-Mar.  Cost  of  goods 

sold $5,168.38 

Profit 2^34.94 

$7,403.32 


Jan.-Mar.  Net  proceeds. .  .  $7,403.32 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 
Los  Angeles 


A     000788795 


OF 
•-RARY 

-ELES;  CALIF. 


